Until a few years ago, people feared taking mortgage loans. Aspiring borrowers had the impression that taking a mortgage loan meant losing ownership of one’s property. However, over the last few years, with the growing popularity of home loans (which are also a type of mortgage loan), borrowers have developed some comfort level with the idea of mortgage loans.
Today, 90% of homeowners opt for a home loan to facilitate the purchase of their home and an increasing number of people are opting for loans against property to take care of their financial emergencies. However, there still exist many misconceptions about mortgage loans. Through this detailed guide, therefore, we will tell you everything you must know about mortgage loans and things you must keep in mind when applying for one.
What Is a Mortgage Loan?
A mortgage loan is a loan taken against an immovable asset, such as a commercial or residential property or even a piece of land. When a borrower opts for this type of loan, they pledge their property as collateral in return for the desired loan amount. The papers of the property stay with the lender until the borrower completes loan repayment. As soon as the borrower has repaid the loan, the lender must return all property papers and release a NOC Letter stating that the borrower has cleared the loan and therefore, the lender has no rights over the property.
When a borrower pledges their property as collateral, the lender does not get ownership rights. However, they are legally allowed to sell the property for loan recovery in case the borrower defaults on loan payments for an extended period. However, even in this case, the lender cannot sell the property without prior notice and without giving the borrower ample time to arrange money to save their property. Further, in case such a situation arises that the lender must sell the property for loan recovery, the lender cannot keep the entire sum received from the auction — they can only take only however much they had lent and must return the remaining amount to the borrower.
In India, many different kinds of mortgage loans are available. Mortgage loans are the most popular of these loans. Under a mortgage loan, a lender sanctions 10% to 20% of a home’s value as a loan. The borrower must arrange the remaining amount or the down payment. The papers of the property stay with the lender until the borrower has repaid the loan in its entirety. Yet another type of mortgage loan available in India is a commercial purchase loan. A commercial purchase loan is the same as a home loan with the only difference being that the funds can be used to purchase a commercial property and nothing else.
However, in India, mortgage loans are synonymous with loans against property. Under a loan against property, a borrower pledges a property they already own — residential or commercial — as security and avail of a loan against it. The borrower continues to be the legal owner of the pledged property and can continue to use the property as they like. Loans against property are secured loans and therefore, they carry a minimum risk for a lender. Lenders, therefore, sanction loans against property at nominal interest rates. Loans against property come with a flexible repayment tenor of 15 to 18 years.
Let us now look at things to keep in mind when applying for a mortgage loan.
Since mortgage loans are synonymous with loans against property in India, we will focus on things to keep in mind when applying for a loan against property.
Things You Must Know Before Applying for a Mortgage Loan
- If you are applying for a loan against property, please keep in mind that no lender will sanction the entire cost of the property as a loan. Most lenders will sanction 50% to 60% of the market value of your property as a loan. If you are lucky, you will find a lender who will stretch this number to 70% to 75%, but do not expect anything more.
- Loans against property are the second cheapest loans after home loans. The interest rate on these loans varies between 9% and 15%. The final interest rate you get will not just depend on the resale value of the property you are mortgaging but also your age, income profile, CIBIL score, etc. Do not go with the first bank/NBFC that extends an offer. Instead, shop around for interest rates and in the end, go with the lender offering you the best interest rates as well as the best service and features and benefits.
- If you are applying for loan against property, know that you must provide all documents that establish your ownership of the property. Keep all such documents ready with you for a smooth and hassle-free loan application process.
- Loans against property tenor vary between 15 to 18 years. While opting for the longest tenor possible will make your EMIs affordable and give you ample time to repay the loan, it will also increase your total interest outgo. A short tenor, on the other hand, will help you save big on the total interest outgo but might end up making you feel burdened and stressed. So, use a loan against property calculator and try to find the right balance between EMIs and the tenor — keep your tenor as short as possible while keeping your EMIs as comfortable as possible.
- Loans against property, sometimes also known as house mortgage loans, take some time to be processed. While some lenders sanction these loans within 3 to 4 days of receiving and approving all documents, some lenders take up to 2 to 3 weeks to approve these loans. This is primarily because loans against property are big-ticket loans and the lender must verify the property before sanctioning a loan against it. This takes time. So, if you are applying for a house mortgage loan, keep some buffer time for loan approval, especially if you are taking a loan to fund an emergency.
- Lastly, borrowers must know that even if they have taken a loan against property — residential or commercial — they can continue to use the property as they were using it before taking a loan against it.
In this article, we have tried to cover everything that borrowers must know about loans against property. Use the information provided in this article to get yourself a good loan against a property deal.
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