Many people tend to misunderstand the term ‘mortgage loan’ and often use it interchangeably with a loan against property. Read on to know more about what is a mortgage loan?
While applying for a home loan, you may come across the term ‘mortgage’ many times in your loan application form. If you are not sure what it means, in simple words, it is a kind of security that you provide to the lender for the credit you are borrowing. When you avail of credit from any financial institution, you may need to give collateral as a security.
What is a mortgage loan?
A mortgage loan is a type of secured loan where you can get the desired funds by providing any asset as a security to the lender. It is one of the most popular forms of financing in India as it helps the borrower avail of a high amount as a loan for a longer period.
A mortgage loan is usually sanctioned against immovable assets like a residential house or a commercial property. The lender keeps the property as collateral until the borrower repays the amount in full. In the event of default by the borrower, the lender has the right to auction off the property and recover the amount.
In India, most lenders offer three types of mortgage loan:
- Home loan
- Commercial property loan
- Loan against property or LAP
A home loan or a commercial loan can be availed only to purchase or construct a home or a commercial space. When you apply for such loans, the lender will have ownership rights over the said property until you repay the loan in full.
On the other hand, the loan against property can be availed by pledging your existing property – be it a residential or commercial property. The lenders do not have any limitations on the purpose for which you use the amount. You can use the amount for a child’s education or marriage, buying a piece of machinery for your business, home renovation, etc.
Types of Interest on Mortgage Loan
You can repay the mortgage loan by opting for a floating interest rate or fixed interest rate. Let us understand more about these interest types.
- Fixed interest rate
As the name suggests, the interest rate remains fixed throughout the loan term. Many experts recommend opting for a mortgage loan with a fixed interest rate only if you are looking to borrow for a shorter duration. The fixed interest rate loan tends to be more expensive than the floating interest rate loan in the long-run.
- Floating interest rate
In floating interest rate mortgage loans, the interest rate fluctuates throughout the loan term based on the prevailing market rates and changes in the RBI rules. It can be challenging to predict how the interest rate will change, but when you are applying for a loan, you can get a fair idea of the interest rate by checking the lender’s website.
What is the Loan to Value in a mortgage loan?
Loan to Value or LTV is the maximum amount you can borrow against the asset that you pledge. LTV is the ratio of the value of the property and the loan amount that the lenders sanction against it.
Typically, the lenders sanction about 50% of the property’s value as a mortgage loan. In some cases, if you have a good relationship with the lender or if you are an existing customer, you may get up to 60% of the property’s value as a mortgage loan.
The lenders usually conduct a thorough inspection of the property value to determine the current market value before approving the loan.
Final Word
Getting a mortgage loan in India is easy. Many lenders offer the loan at an attractive interest rate and have a hassle-free documentation process. It is an excellent way to get funds for your immediate needs. Ensure that you do your research well about the different offers and choose the right lender that offers the loan with favourable terms and conditions.
