Everything You Need to Know About Mortgage Loan

Since banks and NBFCs aggressively promote unsecured loans like personal loans and business loans, there is an increased awareness of these loans. Moreover, opting for unsecured loans is very quick and easy, especially if you have a pre-approved offer. Thus, many individuals do not even consider other loan options that could be better and blindly avail of an unsecured loan like a personal loan.

However, a Mortgage Loan can be a good option when you are in immediate need of a huge amount at better loan terms because it lets you utilise the value locked up in your property.

What is a Mortgage Loan?

As the name suggests, a Mortgage Loan is a type of secured loan that you can avail of by keeping an immovable asset, such as a residential or commercial property, as collateral.

A Mortgage Loan is considered a simple solution for your financial needs because it allows you to use the locked-up value of your property while continuing to enjoy its occupancy. Moreover, the rate of interest on a Mortgage Loan is comparatively lower than on an unsecured loan. It is offered by almost all the banks, housing finance companies, and Non-Banking Financial Companies (NBFCs) in India.

What are the types of Mortgage Loans?

Mortgage Loans are of three types:

1. Home Loan

2. Commercial Property Loan

3. Loan Against Property

A home loan or commercial property loan can be availed only to purchase a home or a commercial property, respectively. Since buying a property is a huge investment, not many individuals can afford it without taking a loan. Hence, mortgage becomes a necessity if you cannot pay the full cost of a property out of pocket. Furthermore, there are some cases when it makes sense to buy a property through a loan even though you can afford to pay for it on your own. For example, to get the income tax benefit, to free up funds for other investments, etc.

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However, in the case of a loan against property, there is no restriction on the final usage of a loan amount, as far as the money is used for a legitimate purpose. That said, unlike a home loan or a commercial property loan, the borrower is free to use the funds for any of his personal or business requirements, such as business expansion, home renovation, child's education, etc.

How does a Mortgage Loan work?

Once the Mortgage Loan is approved, the lender gives you a set amount of money to buy a property or for any other purpose, depending upon the type of Mortgage Loan. You, a borrower, agree to repay the loan over a period of several years, with interest. Until the mortgage is fully paid off, the lender has a right to the property.

What makes the Mortgage Loan different from other loans is that in case a borrower fails to pay the EMIs or defaults on loan, the lender can sell the property to recover the due amount. A lender can also claim any remaining dues from the borrower after it has sold the property. This is not the case in unsecured loans, as the lender cannot ask you to give back the things you purchased from the loan amount; however, your credit score gets affected, and you will end up paying higher interest and late payment fees.

What are the benefits of a Mortgage Loan?

1.Multipurpose Loan:

A home loan or a commercial property loan can only be used to buy the property mentioned in the loan agreement. However, in the case of a Loan Against Property, a borrower can utilise the funds for any legitimate purpose. So, just like a personal loan, you can utilise it for your child's education, home renovation, child's wedding, medical expenses, business expansion, debt management, etc.

2.Lower Rate of interest:

The rate of interest on a Mortgage Loan ranges from 6.50% to 13%, which is comparatively lower than unsecured loans such as personal loans. The interest rate on the Mortgage Loan depends on the value of a property, the loan amount, and your ability to repay the loan. Additionally, a borrower can choose between a fixed interest rate and a floating interest rate. It is advisable to opt for a fixed interest rate only if there is a higher possibility of interest rates continuously increasing in the future.

3.Maximum Loan Tenure:

A Mortgage Loan can be availed for a longer loan tenure of 5-30 years. So, if your fixed monthly expenses are high and/or you are already paying higher EMIs on other loans you may have, you can opt for the maximum loan tenure of 30 years to reduce your EMIs. However, a borrower needs to remember that a longer loan tenure period equates to paying higher interest.

4.Large Sums of Money:

In the case of a Home Loan or Commercial Property Loan, the lenders can offer up to 100% of the property cost, depending on your profile. Whereas, in the case of a Loan Against a Property, the lenders typically offer a loan amount of 50%-70% of the property's current market value. This margin ensures that the lender is prepared for any fluctuations in the real estate industry. So, if you have a high-value property, you can borrow a larger sum of money from it.

5.Soft Credit Score Check:

Most lenders do a soft credit check while processing Mortgage Loan application, since it is backed up by property, making it the best choice for people who do not have a credit history or good credit score. However, depending on their policies, some lenders may require a good credit score to approve the loan.

6.Quick And Easy Process:

As it is a secured loan, it does not have stringent eligibility criteria. Once you, the applicant, submit all the required documents to the lender, such as a copy of your identity proof, address proof, property documents, income proof, etc., along with a duly signed application form, the bank or NBFC processes the loan immediately after verifying the documents.

7.Lower Charges:

A Mortgage Loan typically has a lower processing fee and pre-payment charges compared to other types of loans. Therefore, one needs to compare the additional charges of various lenders before applying for this type of loan.

8.Refinancing Facility:

As the value of the property increases over time, a borrower can increase the amount of his/her loan. This facility is known as Refinancing. Refinancing allows a borrower to get the maximum benefit of a property as collateral. In addition, since it is similar to a top-up loan, it requires fewer formalities. Besides, the top-up loan does not have restrictions on the end-use of the loan amount. So, a top-up loan taken on a home loan or commercial property loan can be used for property renovation, to purchase an electronic appliance, etc.

9.Continue the Occupancy:

Since it is a secured loan, the rights of the property are transferred to the lender. However, a borrower can still continue to occupy the mortgaged residential or commercial property. Moreover, a borrower can also lease/rent out the property to earn an income from it.

What are the disadvantages of availing of a Mortgage Loan?

In India, people are emotionally attached to their property, and, hence, they are usually reluctant to mortgage or sell it for funds. The major disadvantage of availing of a Mortgage Loan, especially, Loan Against Property, is that all the rights over the mortgaged property are transferred to the lender. If a borrower fails to pay the EMIs or defaults on a loan, the lender can sell the property to recover the due amount. A lender can also claim any remaining dues from the borrower after it has sold the property. Hence, if you have only one property, it can be risky to put your house up as collateral.

What documents are required to apply for a Mortgage Loan?

The lender may ask for additional documents or might not require a few documents depending on your profile. Here's a common list of documents you need while applying for a Mortgage Loan:

Personal Documents:

• Application form

• Passport size photographs

• Photo ID proof, such as PAN Card, AADHAR Card, etc.

• Current residential proof, such as AADHAR Card, Driving License, Voter ID, etc.

• Property documents for mortgage

Income Documents:

For Salaried Individuals:

• Last three months' salary slips

• Form 16

• Bank statement for last 6 months

• A cheque for the processing fee

For Business Persons:

• Proof of business existence

• Educational certificates

• Bank statement for last six months (both; business account and personal account)

• For Professionals - Last three years IT returns (self and business), Last three years' balance sheet, and Profit and Loss statement

• For Business Owners - Business profile, Last three years IT returns (self and business), Last three years' balance sheet, and Profit and Loss statement

• A cheque for the processing fee

To Conclude:

A Mortgage Loan is one of the best ways to raise money at a comparatively lower interest rate. However, if the borrower is unable to pay off the loan on time in full, the financial institution is authorised to take possession of the mortgaged property to recover the dues. Like any other loan, defaults in repayment can negatively impact your credit score. You will also have to pay the penalty that will be charged on delayed loan repayment. Therefore, it is advisable to thoroughly assess your repaying capabilities and understand all associated conditions before opting for a Mortgage Loan.

Warm Regards,
Ketki Jadhav
Content Writer