Types of Mortgage Loans in India: A Complete Guide

Financing the purchase of a house or getting cash to finance short-term needs can be made simple and easier by mortgage loans. A huge number of financial institutions provide mortgage loans and serve different needs.

The aim of this article is to enlighten you on the different types of mortgage loans available in India and their relevance to the Indian financial system.

What Is the Definition of Mortgage Loans?

Mortgage loans refer to funds borrowed that use the property as collateral by an individual. Here, the financial institution maintains ownership rights until all the money borrowed has been repaid. These are commonly given when a person wants to buy a house, make some home improvements, or cater to some business purpose like development, scaling, capital upgradation, etc.

What Is a Mortgage Loan?

A mortgage loan is a type of secured loan where a borrower pledges property or real estate as collateral to obtain funds from a lender. The loan is repaid over a specified tenure with interest applied on the principal amount. In India, mortgage loans are commonly used for purchasing residential or commercial property, refinancing existing loans, or availing a loan against property (LAP).

Key Components of a Mortgage Loan

• Collateral: The property or asset pledged to secure the loan, ensuring lender protection.
• Principal: The original loan amount borrowed by the borrower.
• Interest: The cost of borrowing, calculated on the outstanding principal, which can be fixed or floating in India.
• Tenure: The repayment period, which can range from 5 to 30 years, depending on the lender and loan type.

Mortgage loans provide Indian borrowers with access to large funds at lower interest rates compared to unsecured loans, making them a preferred option for property financing.

Different Types of Mortgage Loans Available in India

Different types of mortgage loans have been tailored for different financial standings and use in India by the Indian financial makers, namely:

1. Home Loans

Home loans are used for:

• Buying a new property.
• Building a house on land that belongs to someone already.
• Renovating or fixing an old house.

Here are some features:

• Lenders start charging from 8.5% interest rates per annum.
• They can go up to 30 years.
• To qualify for a home loan, one has to depend on monthly earnings, one’s CIBIL score, as well as one’s property valuation.

2. Loan Against Property (LAP)

LAP allows borrowers to use their property as collateral for personal or business purposes.

Here are some features:

• You may get up to 60% to 70% of its market value as credit.
• Interest rates vary between 9% to 12%, which are a little bit higher than those offered on home loans.
• Tenure periods range from 10 to 20 years.

3. Reverse Mortgage Loans

Reverse mortgage loans are meant for elderly property owners who want access to their equity without having to move out of the house.

Here are some features:

• Instead of getting one lump sum at once, monthly payments are issued.
• This is a very good option for retired people who do not have a fixed income source.

4. Commercial Property Loans

These loans are granted for the purchase or construction of commercial properties.

Here are some features:

• The loan amounts are higher compared to home loans.
• It is suitable for business purposes or for self-employed people.
• The term can be extended for up to 15 years.

Also Read: A Complete Guide to the Different Types of Loans Available in India

Major Mortgage Loan Types and their Interest Rates

The mortgage types that you should choose will solely depend on your financial objectives. Here is a comparison of their interest rates since this essentially defines your loan details:

Home Loans

• Purpose: Buying, building, or renovating a residential property.
• Interest Rates: Typically, 8.5% to 9% per annum.
• Interest Type: Can be fixed-rate (interest remains constant throughout tenure) or floating-rate (linked to RBI repo rate or lender’s benchmark).

Loan Against Property (LAP)

• Purpose: Funds for personal or business needs using property as collateral.
• Interest Rates: 9% to 12% per annum.
• Interest Type: Available as fixed or floating-rate, offering flexibility depending on repayment capacity.

Reverse Mortgages

• Purpose: Provides retirement income to senior citizens by converting property value into monthly payments
• Interest Rates: 8% to 9% per annum.
• Interest Type: Mostly floating-rate, adjusted periodically based on lender’s policies.

Commercial Property Loans

• Purpose: Buying offices, shops, or other commercial spaces
• Interest Rates: 9% to 12% per annum.
• Interest Type: Available as fixed or floating-rate, often depending on loan size and property type.

Fixed-Rate Mortgage

Interest remains constant for the entire tenure, providing predictable EMIs and easier financial planning. Ideal for borrowers seeking stability.

Floating-Rate or Adjustable-Rate Mortgage (ARM)

Interest varies with market rates, often linked to RBI repo or MCLR. EMIs may fluctuate, but borrowers can benefit when rates decline.

Also Read: Home Loan vs Mortgage Loan: What’s the Difference?

Understanding Mortgage Loan Fees in India

When availing a mortgage loan in India, borrowers should be aware of the various fees and charges involved beyond the interest rate. Understanding these fees helps in better financial planning and prevents surprises during loan processing or repayment. Transparent discussion with your lender can also help negotiate or reduce certain charges.

Common Mortgage Loan Fees

Processing Fees

A one-time charge levied by the bank for evaluating and processing your loan application, typically 0.25% to 1% of the loan amount.

Legal Fees

Covers the verification of property documents and title search to ensure the property is free from disputes.

Valuation Fees

Charged for professional assessment of the property’s market value, used to determine loan eligibility and LTV ratio.

Prepayment Charges

Some lenders may apply a fee for early repayment or foreclosure of the loan before the tenure ends.

Late Payment Fees

Penalties imposed if EMIs or interest payments are delayed, usually a fixed amount or a small percentage of the overdue amount.

Stamp Duty and Registration Charges

Mandatory government charges for property registration and stamp duty, varying by state, usually 2%–10% of property value.

Tips for Borrowers

• Compare processing fees across lenders before applying.
• Negotiate legal and valuation charges if possible.
• Clarify prepayment and late payment terms in writing to avoid surprises.
• Use online calculators to factor in all fees for total loan cost estimation.

Key Considerations Before Applying for a Mortgage Loan

It is important to examine your financial situation and select a loan that would fit your needs. Here are some pointers:

• Interest Rate - Shop around for lenders with competitive rates. Just a .5% variance can prove to be a great deal if looked at over time.
• Loan Tenure - Shorter tenures tend to result in higher EMIs (equated monthly installments) but lessen the overall interest paid.
• Credit Score - Approval chances and better rates are enhanced by a score above 750.
• Processing Fees - Processing fees are usually .5%-2% of the total loan amount.
• Legal And Technical Checks - Check that the property has no legal constraints and be sure it has a clear title.

Benefits of Different Mortgage Loan

Opting for the right mortgage loan type allows borrowers to customize their loan to personal financial needs, optimize repayment options, and access competitive interest rates. Understanding the benefits of each type helps in selecting a loan that aligns with your ownership goals and cash flow requirements.

1. Fixed-Rate Mortgage

• Predictable Payments: EMIs remain constant throughout the tenure, aiding in budgeting.
• Stability Against Rising Interest Rates: Shields borrowers from market fluctuations.
• Good for Long-Term Ownership: Ideal for homeowners planning to stay in the property for many years.

2. Adjustable-Rate Mortgage (ARM)

• Lower Initial Payments: Typically starts with a lower interest rate than fixed-rate loans.
• Potential for Lower Costs if Market Rates Drop: EMIs can reduce when rates decline.
• Favorable for Short-Term Ownership: Suitable if you plan to sell or refinance before rate adjustments.

3. Interest-Only Mortgage

• Increased Cash Flow: Pay only interest initially, freeing up funds for other needs.
• Investment Opportunity: Allows borrowers to invest the saved principal payments.
• Delayed Principal Payments: Principal repayment begins later, easing short-term financial pressure.

4. Reverse Mortgage

• Provides Regular Income: Converts property value into a steady cash flow for retirees.
• Allows Aging in Place: Enables seniors to stay in their home without selling it.
• No Monthly Mortgage Payments: Loan repayment is deferred until the property is sold or transferred.

Comparison of Mortgage Product Benefits

Choosing the right mortgage loan depends on your financial goals, risk appetite, and repayment strategy. The following table compares the key benefits and features of different mortgage products to help you make an informed decision:

How To Apply For Mortgage Loan

• Research and select the right mortgage loan type for your needs.
• Compare interest rates and processing fees across lenders.
• Gather documents like income proof, property details, and ID proof.
• After completing this step, click Submit Application Online or walk into any branch of the bank that is convenient for you.
• Upon completion of property and credit checks, wait until approval before disbursement.

The Bottom Line

As someone aspiring to own their first home or as someone who needs finance for their new business/organization, understand that there is always a mortgage loan designed specifically for you. Just follow the guide above, know the type of mortgage loan that suits you best and keep your financial goals as well as monthly budgeting in mind.

If you’re unable to calculate your EMIs, search for an online LAP EMI Calculator. This free online tool will easily help you calculate your monthly expenses timely.

Apply for a mortgage loan today itself and see how your dreams of building an empire or a humble adobe are brought to life. Good luck!

FAQs

Q.1. What are the 6 types of mortgages?

A. The 6 types of mortgages, different from mortgage loans, are as follows:

• Simple Mortgage
• Mortgage by Conditional Sale
• Usufructuary Mortgage
• English Mortgage
• Equitable Mortgage
• Anomalous Mortgage

These are different types of mortgages, as classified under Indian law (specifically the Transfer of Property Act, 1882)

Q.2. What are the three main types of loans?

A. A loan is a sum of money that an individual or company borrows from a lender. It can be classified into 3 main categories, namely, secured, unsecured, and open-end and closed-end loans.

Q.3. How many types of mortgage deeds are there?

A. There are 2 common types of mortgage deeds: Simple mortgage and mortgage by deposit. The mortgage deed contains several key elements, including the parties, deed description, property details, recital, a covenant for repayment, mortgage clause, and possession.

Q.4. Can I get a mortgage loan on commercial property?

A. Yes, banks and NBFCs in India offer mortgage loans for commercial properties, such as offices, shops, and warehouses, with interest rates generally higher than residential home loans.

Q.5. What is the difference between fixed and floating rate mortgage loans?

A. Fixed-rate mortgages have a constant interest rate throughout the loan tenure, ensuring predictable EMIs. Floating-rate (or adjustable-rate) mortgages have interest rates that vary with market benchmarks like MCLR or repo rate, causing EMIs to fluctuate.

Q.6. How is EMI calculated for a mortgage loan?

A. EMI (Equated Monthly Installment) is calculated using the loan principal, interest rate, and tenure, typically via the formula:
EMI = [P × R × (1+R)^N] / [(1+R)^N – 1],
where P = principal, R = monthly interest rate, N = number of months.

Q.7. Can NRIs avail a mortgage loan in India?

A. Yes, NRIs can apply for mortgage loans in India for residential or commercial property, subject to income proof, NRI banking requirements, and existing eligibility criteria.

Q.8. Is collateral required for a mortgage loan?

A. Yes, a property or asset is pledged as collateral, which secures the loan and protects the lender’s interest.

Q.9. Are there prepayment or foreclosure charges on a mortgage loan?

A. Some lenders may apply prepayment or foreclosure charges, though charges vary for fixed or floating-rate loans. Always check the terms before applying.

Q.10. What are the tax benefits of a mortgage loan?

A. Borrowers can claim tax deductions on interest payments under Section 24b and principal repayment under Section 80C, subject to limits and property type (self-occupied or rented).

Q.11. Can I refinance an existing mortgage loan to get better terms?

A.Yes, refinancing allows you to replace your current loan with a new one at a lower interest rate, potentially reducing EMIs or shortening tenure.

Q.12. How long does it take to get a mortgage loan approved?

A. Approval usually takes 7–30 days, depending on documentation, property verification, and lender processing times.

Q.13. What happens if I default on a mortgage loan?

A. Defaulting may lead to penalties, late payment fees, and a negative impact on your credit score. Prolonged defaults can result in the lender initiating legal proceedings to recover the loan by selling the pledged property.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.