What is a mortgage loan and what different types of mortgage loans?

Posted on: Mar 2, 2021 | 3 mins | Written by: HDFC ERGO Team

What is a mortgage loan and what different types of mortgage loans?

Buying a house or property is a dream for most Indians. If you are looking to buy a property, it is highly likely that you would have come across the term mortgage. But what exactly does a mortgage mean? And should you opt for a home insurance policy with a mortgage? Here is all that you need to know about a mortgage and the types of home loans that you can choose from.

What is the meaning of a mortgage?

In simple terms, a mortgage is an agreement between you and a lender. According to this agreement, the lender has the right to take your property, should you fail to repay the loan that you have secured against the property or house. These loans are usually used to purchase a house or land or to take a loan against the property for business purposes.

How do mortgages work?

A mortgage is essentially a secured loan. When you opt for a mortgage, the property that you have acted as collateral and a loan is provided against it. The lender holds on to the property, till the entire loan is paid off. And usually, the payments are done via EMIs or equated monthly installments.

Since they are secured loans, the interest rates are lower compared to other types of loans. As you start to repay the loan, interest accounts for most of the EMI during the initial days. And as the loan progresses, a higher principal is deducted.

Different types of mortgages in India

The following are different home loan types that you can choose in India.

1. Simple Mortgage

In this type of loan, the borrower mortgages their immovable asset in order to secure a loan. And if the borrower fails to repay the loan, the lender can sell the property.

2. Conditional mortgage

In this, the borrower gets into an agreement with the lender. If the borrower fails to repay or defaults, the conditions come into effect. However, they do not hold any value if the borrower repays successfully.

3. Ownership exchange

In this type of loan, the property in question is transferred to the lender and they receive any rent or profit. This does not create any personal liability for the borrower.

4. Title deed mortgage

In this type of loan, the borrower deposits the title deed to receive a loan against it.

5. Lender’s liability

In this type of loan, there is a personal liability on the borrower. The property is transferred to the lender with the condition that it will be reversed once the repayment is complete.

Common mortgage loans

There is no doubt that mortgage loans are some of the most secure loans that you can opt for. The following are the different types of home mortgages.

1. Home loan

This is the most popular type of mortgage in India and there are good reasons for the same. The interest rates of home loans are quite competitive, the tenure of the loan is flexible and comfortable and more importantly, they offer tax benefits. You can utilise a home loan to buy land, renovate a house, buy a house that is under construction or build a house from scratch.

2. Loan against property

This type of loan can be used for both residential and commercial purposes. In this loan type, a borrower mortgages their property to get funds from a financial institution. As a part of the loan, they must submit all the original documents to the lender. The funds can either be used for personal or business purposes.

3. Second mortgage

Financial institutions provide a second mortgage for houses that are already under a loan. These types of loans are otherwise known as top-up loans. You can use the loan either for personal needs or for refurbishment of the house. A second mortgage is largely dependent on your history of repayment and credit score.

4. Commercial

This type of loan is usually utilised by businesspersons and entrepreneurs. The loan can be used for buying a shop, commercial complexes, or office spaces. The interest rates for such loans are quite competitive and they must only be utilised for buying a property.

The need for a mortgage

Mortgage loans are primarily used to finance buying of houses or properties. People need mortgages because the property prices of properties and houses have always been high. Securing the funds to buy a house or property can be quite difficult. Since mortgage loans are secured loans, the interest rates are lower as compared to other types of loans. Also, these loans offer tax benefits.

Thus, allowing people to purchase a house and continue with their lives without being financially halted. It is highly recommended that you opt for homeowners insurance for the mortgage in question. Given the higher price of acquisition, any unforeseen events can put a dent in your finances. However, homeowners insurance will safeguard your finances and house.

Conclusion

Now we know the different home loans types and the importance of opting for a mortgage loan. A mortgage allows individuals to buy properties and houses, which otherwise would be difficult if one were to rely on gathering enough funds for the purchase. And given the higher costs associated with them, it is advisable to choose a home insurance plan.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

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