A mortgage loan is a type of loan that you take to purchase a new home or a piece of land. You can also avail of a mortgage loan to purchase various kinds of real estate properties or even to extend an existing property.
Are you considering availing of a mortgage loan in India to purchase a new house or a residential building? What would be your options? In our guide below, you’ll learn more about mortgage meaning and the different types of mortgage loans available for aspiring borrowers based on their needs.
Once you have availed of the loan, you can repay it to the lender in a series of monthly payments. The individual payments also cover a part of the principal mortgage amount and mortgage loan interest. These are referred to as EMIs. Different EMI options are available for different kinds of mortgage loans.
In India, there are several kinds of mortgage loans available. Here’s an overview of each of them.
Table of Contents
Mortgage Loan Against Property
This is also popular as a loan against property (LAP), and this is available both for residential and commercial properties. For such a mortgage loan, you need to own a property that you can mortgage or present as a surety. You will be required to submit the original documents of the property to the lender, and the documents will remain with the lender till you’ve paid the complete amount, including the interest.
Fixed-Rate Mortgage Loan
This type of mortgage loan is usually offered at a fixed rate of interest. The primary benefit of such a loan is that you are always aware of your loan liability, and you can plan your finances accordingly. For instance, you know that even after 15 years, how much amount you are going to be paying monthly. This enables you to give a fixed monthly installment no matter what the current market rates for availing of a mortgage loan are.
Simple Interest Mortgage Loan
For such a loan, your mortgage loan interest is calculated daily. This is different from when the interest rate is calculated monthly, which is the rule. In the simple interest mortgage loan, the daily interest is first calculated by dividing the mortgage loan interest rate by 365 days and then multiplying the result by the outstanding mortgage loan balance. To pay monthly interest, you can multiply the number by the number of days in the month. Based on the calculation, a borrower may pay more interest this way than paying on a monthly interest type of mortgage loan.
Adjustable-Rate Mortgage Loan
In this type of mortgage loan, the rate of mortgage loan interest is fixed, and it begins to correspond to fluctuations in the economy. Based on whether a borrower avails of a loan when the interest rates, typically, are low in the case of adjustable-rate mortgage loans, it is often easier to get the loan and pay off the installments. The individual availing of the mortgage loan may be able to get a relatively lower interest rate than what is prevalent in the current market. One of the cons is that the mortgage loan interest rate and, subsequently, the EMIs, may increase significantly over time.
English Mortgage
Following the English mortgage loan agreement, the individual who borrows the loan agrees to transfer the property to the lending party if the loan is not repaid until a particular date. It does not indicate that the property is transferred permanently to the lending body. If the mortgage loan borrower pays the amount entirely, the property is transferred back to the borrower. Here are the features of an English mortgage:
- The borrower agrees to repay the mortgage loan on a particular date
- The mortgaged property is then transferred to the lender
- The absolute transfer is made based on the condition that the lender will be re-transferring the mortgaged property to the mortgage borrower on paying the entire mortgage loan amount
- While the possession rights stay with the mortgagee, the mortgagor is permitted to either occupy the property or rent it out
Usufructuary Mortgage Loan
These types of mortgage loans are quite popular in rural India. Since usufructuary is not a common term, it needs a small explanation. Usufruct is derived by combining two Greek terms, “usus” and “fructus”. Usus indicates the right to utilize property in its current form without doing any modifications to it or harming it, and fructus indicates the right to enjoy the fruits or the products of the property being used during the mortgage loan.
Unlike the typical mortgage loan against a property where the property documents are handed over to the lending institution, in the case of a usufructuary mortgage loan, the whole property is handed over to the lender so that the lender can make use of the property for financial gains. The property is given to the lender for a specific number of years, and there are no liabilities on the borrower. Typically it is up to the mortgage lender to make good on the loan he/she has pledged with the mortgagor.
Conclusion
Besides these types of mortgage loans, there’s a sub-prime mortgage loan that is offered to borrowers who have a poor credit history. Naturally, the interest levied on such a mortgage loan is comparatively higher.
Our pro tip: Use a loan calculator against property to get an estimate of the EMI outgo and better plan the mortgage loan closing process. Availing of a mortgage loan is a long-term commitment: you are likely to be paying EMIs for years to come, sometimes for 25 to 30 years. Based on your current financial standing and financial planning abilities, it is essential that you study all kinds of mortgage loans available to you and then make a calculated decision that’s best suited to your situation.
