Mortgage Loan

As loan-based financing gains momentum among retail borrowers, they are looking for wider benefits against minimum cost. Such financing sources not only allow one to fulfil the funding needs but also make them affordable to avail. In this scenario, one of the popular sources of financing one can look forward to include mortgage loan.

Today, more and more individuals are bent towards fulfilling their big-ticket financing needs with the help of a mortgage-based loan. One of the primary reasons behind the popularity of these advances is their widespread benefit inclusion that makes them affordable as well as easy to manage over an extended duration agreed upon as the loan tenure. Let’s take a detailed look at what this financing option comprises, how it functions, and the benefits provided thereon.

What is a Mortgage?

Secured financing arrangements require borrowers to provide an asset as security against which a suitable funding is provided. Asset collateral in such cases can be provided under different arrangements for security creation and release. Mortgage security is one such collateral creation.

Mortgage collateral is based on the type of asset securitised, whereby only fixed assets qualify for such securitisation. The assets you can use to avail a mortgage loan thus include residential property, commercial property, land, building, plant and machinery, etc.

Types of Mortgage Financing

Mortgage financing can be primarily identified under two different loan categories explained below.

Loan against property

A loan against property is a type of mortgage credit that can be availed against a residential or commercial property. The financing so availed is usually in big ticket and comes with zero restriction to end-use. You can thus utilise the loan amount to fulfil any personal or professional funding need.

It is a long-term financing option, whereby the loan tenure usually extends up to 20 years or more depending on the lending institution selected.

Home loan

A home loan is a type of mortgage advance that is customised for house property purchase financing only. The loan is thus provided only against the residential property, unlike the loan against property that allows any property to be used as collateral.

Under a home loan, an individual registers a house property against a certain down payment, based on which and the borrower’s eligibility, the lenders provides remaining funds as house purchase financing.

Apart from these two, mortgage financing can also be based on other properties, such as plant and machinery, land, etc. You would need to avail separate loans as per the lender’s providence based on the asset you are ready to mortgage for the purpose of raising funds.

The Process of Mortgage Loan

Mortgage lending and borrowing is a lengthy procedure that requires multiple step completions. Today, however, lenders have simplified the loan processing by introducing online lending platforms that not only require minimal documentation but also process the application faster, thus reducing the total time involved.

After having met the eligibility requirements, a prospective borrower applies for the loan online or offline with the selected lender and submits the necessary documents. Once applied, the lender goes through applicant screening for qualification based on the different criteria established, such as income and repayment capacity. When the eligibility is established, the lending institution proceeds to verify the property mortgaged. Such verification can be both documentation-based and on-site verification, which the applicant needs to cooperate with.

Based on the verification result, the loan amount is sanctioned as per the property’s current market value. The sanction letter so issues contains the loan details the lender agrees to offer, which primarily includes the loan amount, tenure, interest rate and such related terms. If the borrower agrees to the stated terms, he or she needs to sign the document and return it to the lender. According to this, the loan is approved and disbursed. Here, you must know that disbursal in the case of loan against property is done directly to the borrower’s account. 

However, for a home loan, the loan amount approved is only provided to the builder, seller or agent involved in selling the house. In case the house property is under construction, the loan amount is disbursed in parts based on the stage of such construction. It ensures that the loan amount utilisation is done strictly on house purchase only.

Interest charge on the loan amount starts right after the loan is disbursed, whether in part or in full. Thus, a borrower also needs to start the repayment in EMIs immediately after receiving mortgage loan approval and disbursal. The EMIs payable each month comprise both the principal and the interest amount such that the total loan liability is repaid by the tenure’s end. A borrower thus needs to repay the loan liability in EMIs until the tenure’s end. Once the loan repayment is completed in full, the lender releases the asset collateralised from mortgage, issuing an NOC clearing the property from any such charge.

In case the borrower fails to repay the loan liability in part or in full, the lender reserves the right to auction the mortgage property to recover the amount. Any additional amount raised from such auction is returned to the borrower after having deducted the amount equalling the loan liability.

During the loan tenure, a borrower also has an option to prepay the loan amount with any lump-sum fund availability. Prepaying the loan liability either through part-prepayment or foreclosure not only cuts short the loan tenure but also checks the interest addition, thus reducing the total loan liability. One can also opt for a balance transfer facility during the loan tenure to avail various associated benefits.

Balance Transfer on a Mortgage Advance

A balance transfer facility on mortgage advances like a home loan or a loan against property allows a borrower to switch to a new lender offering reduced rates and other favourable terms than the existing lender. Such lender switching is done based on the outstanding loan principal and not on the total loan liability as calculated by the existing lender.

Under a balance transfer facility, the account with the existing lender is foreclosed and a new account with the new lender is opened, with a resultant transfer in the outstanding loan amount. The EMIs are then calculated based on the new rate of interest, which often leads to increased affordability due to reduced instalment amount over the pre-determined tenure. Contrarily, the borrower also has an option to keep the EMIs at the same amount and opt for a reduced tenure to pay off the loan liability early.

Other favourable benefits one can avail with a mortgage loan balance transfer facility is the variation in repayment options, easy loan tracking, reduction in other loan charges, and the likes.

Note that lenders specify the need to pay a stipulated number of EMIs before you opt for a balance transfer facility. Make sure that you have checked this with your lender before opting for one. Also, it is beneficial to opt for a loan balance transfer towards the beginning of the loan tenure instead of later. It is because lenders tend to keep the interest component of each EMI high towards the beginning of the tenure to minimise the risk associated with high-value lending. As the tenure passes, the interest component reduces, giving way to principal increase. Thus, if you delay in opting for a balance transfer facility, you would have already paid the interest levied, leaving you with a large chunk of unpaid principal amount.

However, when determining the right time to opt for a balance transfer facility on your mortgage loan, you must also compare the charges involved and the interest savings made. It would only be feasible to opt for the facility if the interest saved is significantly greater than the charges you end up paying in availing home loan or loan against property balance transfer facility.

Benefits of Mortgage-based Loans

Some of the top benefits you can look forward to when availing a mortgage loan include the following.

Big-ticket financing

Eligible candidates can avail a mortgage amount going as high as Rs.1 Crore to Rs.3 Crore. Such high-value financing allows you to fulfil your big-ticket needs with ease.

High LTV

LTV or Loan to Value ratio is a concept associated with all secured loans, whereby the LTV percentage caps the maximum loan availability to an individual. Such percentage is based on various risk factors and determines the part of a property’s market value one can avail as financing. In the case of mortgage loans, LTV can go as high as 90%. 

Extended repayment tenure with flexibility

Repayment tenures for mortgage advances usually extend long-term for up to 20 years, allowing one to choose the suitable duration for EMI payment flexibly.

Low rate of interest

Interest rates on mortgage loans are usually lower than unsecured loans, making them affordable financing options.

Financing for all types of funding needs

One can meet all types of funding needs, be it personal or professional, with the help of mortgage advances like loans against property. Customised loan options like home loans also allow one to complete residential property purchase.

Make sure to compare lenders before finalising your loan option for maximised benefits on the advance.

Learn more about loans and finance from the official website.


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