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:

Simple Mortgage

The borrower commits personally to repay the loan. If repayment fails, the lender has the legal right to sell the mortgaged property to recover dues, but ownership remains with the borrower.

Mortgage by Conditional Sale

Here, the borrower sells the property to the lender on the condition that the sale becomes void once the loan is repaid. If repayment is not made, the sale becomes absolute in the lender’s favor.

English Mortgage

The borrower agrees to transfer ownership of the property to the lender with a promise that the property will be re-transferred once the loan is repaid fully.

Usufructuary Mortgage

The borrower hands over possession of the property to the lender, who can use the property or collect rent/income until the loan is repaid. Ownership is not transferred.

Mortgage by Deposit of Title Deeds (Equitable Mortgage)

The borrower deposits property documents with the lender as security without a formal registered deed. Common in cities and easier to execute with minimal paperwork.

Anomalous Mortgage

Any mortgage that does not fit into the above categories or is a mix of two or more types is called an anomalous mortgage. Terms are usually customized between borrower and lender.

Different Types of Mortgage Loan

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

Why Do People Need Mortgages?

A mortgage allows individuals to buy property without paying the full price upfront. It provides financial flexibility, making homeownership possible while also offering long-term benefits for both personal finance and wealth creation.

• Affordability and Access to Homeownership
  Enables buyers to purchase a home by spreading payments over years instead of paying the entire cost at once.
• Leverage and Wealth Building
  Homebuyers can use borrowed funds to acquire a valuable asset and build equity as property value appreciates.
• Investment Potential
  Mortgaged property can serve as a long-term investment, offering rental income or capital gains.
• Tax Benefits
  Borrowers enjoy deductions on interest and principal repayment under income tax laws, reducing the overall cost of borrowing.
• Structured Repayment and Stability
  Fixed EMIs ensure disciplined repayment and provide financial stability in the long term.

Benefits of Mortgage Loans

A mortgage loan is one of the most effective ways to own property without immediate financial pressure. It not only provides access to homeownership but also offers long-term financial advantages that support wealth building and stability. Here are the key benefits of mortgage loan:

• Buy Property Without Upfront Payment
  One of the biggest mortgage loan advantages is that you don’t need to pay the full property cost upfront, making homeownership more accessible.
• Improve Credit Score
  Regular and timely EMI payments on a mortgage help strengthen your credit score, improving future borrowing capacity.
• Flexible Repayment
  Mortgage loans come with customizable tenures and repayment options, allowing borrowers to manage finances more efficiently.
• Tax Benefits
  Borrowers can claim tax deductions on both interest paid and principal repayment, reducing the effective cost of borrowing.

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 Home Loan EMI 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.).

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.