mortgage home loan

Comprehending how mortgage home loans work

Understanding the different mortgage nuances, their types and interest rates can be mind-boggling. This article seeks to breakdown the mysteries surrounding mortgage home loans.

So what is a mortgage loan? A mortgage loan is a secured loan as opposed to a personal loan that is unsecured. In a mortgage loan, the borrower presents his immovable asset, like a piece of land or an apartment as security to obtain the loan amount. The lender can be a bank or any other financial institution. This security offered by the borrower to the bank in order to secure a loan, is otherwise called a “collateral security.” When the borrower borrows money to purchase a residential apartment or land, the type of security is called “principle security.”

There are two types of mortgages currently offered by banks and financial institutions.

 Equitable Mortgage 

In an Equitable Mortgage, the borrower deposits the title deed of the property to the lender. After the borrower repays the mortgage in full, the lender returns the title deed to the borrower.

Registered Mortgage 

When a borrower chooses a Registered Mortgage, the party has to register the deed in the name of the lender. Such a property is called “encumbered property” and cannot be changed until the entire charge on it is repaid. After the borrower repays the mortgage in full, a deed releasing the charge has to be prepared, executed and registered back to the borrower.

These mortgages are also known as Loan Against Property (LAP). This type of loan is offered on a certain percentage of the property’s market value. The percentage varies at 40-60% of the property’s current market value. This type of loan can be availed for the following reasons:

  • Business related expenses/expansion plans
  • Getting your children married
  • Funding your children for higher studies abroad
  • Funding medical treatments
  • Funding your dream vacation

Most people apply for a personal loan to address the requirements stated above. However, personal loans otherwise known as unsecured loans are far more expensive. As a standard, personal loans are offered at a much higher interest and for this reason are more expensive to repay. So what are the key features of secured and unsecured loans?

Secured Loans

  • Loan availed by mortgaging property
  • Cheapest loan available after home loans at the rate of 12- 16%
  • EMIs are cheaper as rate of interest is lower
  • Maximum loan eligibility is determined by the market value of collateral
  • Maximum loan repayment tenure is 15 years (180 months)

Unsecured Loans

  • Loan secured without a guarantor or security
  • Higher rate of interest than LAP, at the rate of 16-21%
  • EMIs are higher
  • Maximum loan eligibility is determined by the individual’s income
  • Maximum loan repayment tenure is 5 years (60 months)

Loan Against Property is by far the best way to fund your interests. However, if the borrower is unable to repay on time, the bank has the authority to seize the property.