A mortgage loan is a type of secured loan provided by a financial institution to help individuals or businesses buy real estate, such as a home, or a property. These loans are taken against property for unrestricted use, while home loans are specifically taken to either purchase or construct a new property.
Read on to explore how these loans work, its differences with home loans, and several factors that affect mortgage loan eligibility and terms.
Let’s dive in!
Mortgage Loan – Meaning and Relevance
A mortgage loan, commonly referred to as a Loan Against Property, offers a convenient way to obtain funds by using an existing property, be it residential or commercial, as collateral.
The meaning of a mortgage loan differs from personal loans, as the former is a secured form of loan while the latter is an unsecured loan that can be used for unrestricted usage.
Mortgage loans are also different from home loans, as the latter is taken to purchase a home or property in instalments.
Difference between Mortgage Loans and Home Loans
Mortgage loans and home loans share many similarities, primarily because they both fall under the category of secured loans and utilise property as collateral.
The difference is that in home loans, the property is used as collateral against funds that can only be used to either purchase or construct a new house. This collateral is pledged till the time the entire home loan is repaid by the borrower.
On the other hand, in the case of a mortgage loan, the property is pledged as collateral, for funds that can be used for various purposes. This, again, is applicable till the time the entire loan is repaid.
Understanding Mortgage Loans – Benefits and Features
Here are some of the major benefits of getting a mortgage loan:
Flexible Loan Tenure
The maximum tenure allowed for mortgage loans is 15 years. This also means you can have lower EMIs and a much wider spread of interest charges throughout the tenure. Additionally, it helps to build your credit rating and further strengthens your relationship with the financial institution.
Low Fees and Charges
The processing fee for mortgage loans is just around 1.5%-2%. Additional fees and charges like prepayment/foreclosure charges may vary from one financial institution to another. You can grab a loan deal at negligible charges based on your relationship with the loan provider.
Low Rate of Interest
It greatly depends on the kind of interest rate that is offered by the financial institution – whether it is fixed or floating. While the fixed interest rate remains constant throughout the tenure, the floating interest rate fluctuates according to the Repo Rate or MCLR. Considering a fixed interest rate, mortgage loans invite a lower rate of interest as compared to personal loans.
Loan-to-Value Ratio
Loan to value ratio means the loan amount that is made available to the borrower based on the value of the property. Online Mortgage loans are generally available at 80% LTV. So, for example, the value of the property is Rs. 50 lakhs. So, in this case, the loan amount would be Rs. 40 lakhs for mortgage loans.
Mortgage Loans: What Are the Features?
Given below are the essential features of mortgage loans that you need to check out:
Factors that Influence the Interest Rate
Various factors that influence the calculation of your mortgage loan interest rate are your credit rating, the tenure of your loan, the type of property that you would be pledging as collateral, your age, income, stability of employment, and place of residence.
Various Types of Mortgage Loans
You can take a loan against property by using your residential or commercial property as collateral. You can also use alternative assets like farmhouses, reconstructed plots, guest houses, or other commercial shops and places as security for a mortgage loan.
Property title and Insurance
Before you apply for a mortgage loan, you must thoroughly check if the title is clear and if there is a legal obligation or existing loan of the collateral property. Also, you must have insurance cover for the property, which can protect it from externalities and hazards.
Eligibility for a Mortgage Loan
You will be eligible for a loan against the property if you meet the following criteria:
- Your age should be between 25-75
- You should be in your existing business for a minimum of 3 years
- There are generally no pre-defined income requirements for a LAP, as it is an unsecured form of a loan.
Conclusion
Mortgage loans may be popular terms such as Loan Against property or LAPs; however, these are not the same as personal loans or home loans. Make sure you understand the terms and conditions well and compare different loans before applying for a loan to make informed decisions and secure the most suitable loan for your unique financial needs and goals.