What Is a Mortgage? Types, How They Work?

Many people in India dream of owning a house. However, they are unable to afford it because of a lack of funds. In such cases, they often need financial assistance from lending institutions.

This is where mortgages come into play. By definition, a mortgage is a loan where a property is kept as the collateral for security. If the borrower fails to repay the loan, the lender can auction away the property to retrieve the customer’s outstanding loan amount.

There are different types of mortgage loans in India, each with its own rules and benefits. This guide will help you understand how mortgages work and what options you have.

Also Read: What is Loan Against Property? - Features, Eligibility, Documents, and more.

What is a Mortgage?

A mortgage is a secured loan where property is collateral. The borrower gets funds, and the lender holds the property title until the loan is repaid. If the borrower defaults, the lender can sell the property to recover the money.

How does a Mortgage Work?

• The borrower applies for a loan with an institution.
• The lender checks credit score, income, and property value.
• If approved, the loan is given, and the property is mortgaged.
• The borrower repays in EMIs (Equated Monthly Instalments).
• After full repayment of the loan amount, ownership is transferred back to the borrower.

Key Facts to Keep in Mind:

• Loan tenure can range from 5 to 30 years.
• Interest rates vary based on market conditions and borrower profiles.
• Prepayment is allowed but may have charges.

Types of Mortgages in India

India has different mortgage options depending on needs. The most common types of mortgage India offers include:

1. Simple Mortgage

• The borrower personally commits to repaying the loan.
• If they fail, the lender can sell the property to recover the outstanding loan amount.
• The lender does not take ownership but has the right to sell.

2. Equitable Mortgage (or Mortgage by Deposit of Title Deeds)

• The borrower deposits property documents with the lender.
• No formal agreement is needed.
• Common in urban areas and requires minimal paperwork.

3. Registered Mortgage

• Requires a formal agreement and registration with authorities.
• More secure for both borrower and lender.
• Common in high-value property deals.

Mortgage Loan Types in India

Lenders offer different types of mortgage loans based on borrower’s needs. These include Home Loan, Loan Against Property, Plot Loan, and Commercial Property Loan.

1. Home Loan

• Used to buy a residential property.
• Available with both fixed and floating interest rates.
• Government schemes like PMAY (Pradhan Mantri Awas Yojana) provide subsidies on interest.

2. Loan Against Property (LAP)

• The borrower mortgages existing property to get funds.
• It can be used for business, education, or medical emergencies.
• The loan amount depends on the property’s market value.

3. Plot Loan

• Helps individuals buy land for residential construction, usually within municipal limits, with a set timeline for building.
• Interest rates are slightly higher than home loans, with eligibility based on income, credit score, and property location.
• Provides flexibility to purchase land, potential tax benefits, and structured repayment options like home loans.

4. Commercial Property Loan

• Used for buying shops, offices, or business spaces.
• Interest rates are higher than residential mortgages.
• Important considerations before taking a mortgage

Before applying, consider these points:

• Interest rates: Compare lenders to find the best rate.
• Processing fees: Lenders charge fees, usually 0.5% to 1% of the loan amount.
• Loan tenure: Longer tenure means lower EMIs but higher interest overall.
• Credit score: A score above 750 improves chances of approval and better rates.

Also Read: Types of Mortgage Loans

The Bottom Line

A mortgage is a great way to fund a property purchase or get financial help. With many mortgage loan types, choosing the right one is key. Compare lenders, check interest rates, and understand the terms before applying.

Looking for the best mortgage options? Apply for a loan now and take the first step towards financial security!

Moreover, the Godrej Capital loan calculator can help you calculate EMIs and analyse monthly instalments to fulfil your financial goals.

FAQs

Q.1. What is a mortgage loan, and how does it work?

A. A mortgage loan is a secured loan where a property is used as collateral. The borrower receives funds from the lender and repays the loan through Equated Monthly Instalments (EMIs). If the borrower fails to repay, the lender can sell the property to recover the outstanding amount.

Q.2. What are the different types of mortgage loans available?

A. Common types of mortgage loans include:

• Home Loan – To purchase or construct a residential property.
• Loan Against Property (LAP) – Using an owned property as collateral to secure funds.
• Plot Loan – To buy land for residential construction.
• Commercial Property Loan – For purchasing business properties like offices or shops.

Q.3. What is the minimum credit score required for a mortgage loan?

A. Most lenders prefer a credit score of 750 or above for mortgage loan approval. A higher score improves your chances of securing a loan at a lower interest rate. However, some lenders may offer loans to individuals with lower credit scores at higher interest rates.

Q.4. How can I get the lowest interest rate on a mortgage loan?

A. To secure a lower interest rate:

• Maintain a high credit score (750+).
• Compare interest rates from multiple lenders.
• Opt for a shorter loan tenure if financially feasible.
• Have a stable income and a good repayment history.

Q.5. What documents are required to apply for a mortgage loan?

A. While requirements may vary, key documents typically include:

• Identity proof (Aadhaar, PAN, Passport, etc.).
• Address proof (Utility bill, Aadhaar, etc.).
• Income proof (Salary slips, bank statements, ITR, etc.).
• Property documents (Title deed, sales agreement, etc.).