Mortgage Loan

Among a host of loan options available with banks in India, a relatively prominent product that finds wide acceptance is the Mortgage Loan. A mortgage loan is a secured loan that is sanctioned against your freehold residential or commercial property. The product is also termed more commonly as a home loan or a commercial property loan. This loan works well for customers as it allows them to borrow a large amount of money from the bank against personal or business real estate for to meet financial needs.

What is Mortgage Loan?

A mortgage loan is called the most secured loan in the market. It allows anyone – be it an individual or an entrepreneur – to mortgage his/her property and get money against it without any risk to the bank. It is also one of the cheaper retail debt products available in the country. This is because being a collateral-based loan, its rate of interest is normally lower than other debt offerings from banks such as personal loans or business loans. The disbursed amount on the mortgage depends on the value of property. Loan eligibility is determined primarily by the strength of one’s income and the value of the property one possesses.

Like all other loans, the EMI on a mortgage loan comprises the interest and the principal. Once the borrower repays the full principal, the loan contract ends with the bank. Additionally, the bank’s lien on the property ends and the real estate becomes a freehold property. If for any reason, the loan amount is not repaid, the lender bank has the right to sell the property and recover its money. This process, called foreclosure, negatively affects one’s ability to take loans in the future.

Is There Any Difference Between a Mortgage Loan or a Home Loan?

To understand this better, let us take a look at what mortgage means under Indian law.

Mortgage Definition Under Indian Law

According to the Transfer of Property Act, 1882, a mortgage is “the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan and existing or future debt or the performance of an engagement which may rise to a peculiarly liability”.¹

Looking at this definition, it is clear that mortgage essentially is a document that transfers interest in immovable property. Over the years, the word has come to refer to also the loan that people take against the mortgage. The loan amount can be used for buying real estate (which is called a home loan or a commercial property loan) or for other needs including buying real estate (this loan is called loan against property in the market).

A home loan is a type of mortgage as it requires keeping as collateral a “specific immovable property” and not any other movable asset like gold, jewellery, stocks, etc. The distinction between a mortgage loan and a home loan can be gauged from their names – a home loan essentially means a loan to purchase a home (a residence) while a mortgage loan primarily refers to taking loan against property (residential or commercial) to meet financial requirements.

Some other points that are to be noted from the definition of a mortgage under Indian law:

• If one goes by the definition it states that mortgage only involves “transfer of interest”. This implies that the ownership of the property remains with the borrower. This ownership is only transferred to the bank in the event of default on loan repayment.
• Moreover, the definition also implies that one can apply for this loan from any bank by extending the property as a security or collateral. This forms the basis of a mortgage loan.
• Case laws on the subject over the years have mentioned that the property for a first mortgage must be a freehold and no one else will have a right of interest in the land or building provided as security in precedence to the bank. Loan against property can be given even if some other entity has a prior right due to a pre-existing mortgage.

Benefits of a Mortgage Loan

A mortgage loan is a popular product as it has quite a few benefits for the borrower as well as for the lending bank. For instance, a higher loan amount is usually granted for a longer tenure period when compared to conventional loans. Moreover, the interest rates are discounted and much lower than other loans. Most banks accept both commercial as well as residential properties as security. Apart from these, there are some other attractive benefits of a mortgage loan. Some of these are mentioned here.

• Tax-savings for Mortgage Loan to Buy a Home: This is perhaps the most significant advantage of a mortgage loan to buy a home. The Income Tax Act, 1961, allows borrowers to deduct both the principal as well as the interest (up to specified limits) from their income to get to the taxable income for the year. The savings are two-fold, first on the principal and second on the interest. The principal paid during the year is eligible for deduction up to Rs. 1.5 lakhs under section 80C. The limit on Rs. 1.5 lakhs is inclusive of all other avenues under section 80C. This means that if a borrower has invested Rs. 50,000 in insurance and pension plans, they will still be able to avail Rs. 1 lakhs as deduction for the mortgage principal. The interest paid on the loan is deductible up to Rs. 2 lakhs under section 24 of the Income Tax Act if the property is self occupied.
• Tax-savings for Mortgage Loan for Businesses: A businessperson who has taken a second mortgage (more commonly called a loan against property) can claim tax deduction on the entire amount paid on the loan if he or she can prove that loan was taken to improve the business. The tax incentive is also available for a business loan against any other kind of securities such as gold, jewellery, or any other assets that he/she possesses. However, if you need a large amount of money that runs into crores or lakhs, the only feasible asset that you may be able to offer as security is the property which belongs to you. This is considered as the most secured business loan among a host of other loan options available because you can avail it for any purpose ranging from debt consolidation to home renovation and also for your child’s marriage or higher education. The second mortgage loan is a multi-purpose loan.
• Risk-Free Loan: This mortgage loan is granted after keeping the property as a security with the bank. The lending bank does not have to worry about the loan not being repaid, as the bank can sell off the property and get its money back if the borrower fails to repay the loan amount. The borrower holds the ownership of the property when the loan is active and regains full control as soon as the loan amount is fully repaid. He/she, thus, does not have to worry about the property being taken away from him/her without any valid reason.

• Easy to Repay: One of the better things about a mortgage loan is that when you take the loan you can repay the amount over a longer tenure as compared to other loans. It can be paid in easy monthly instalments over periods as long as 25 years. This makes the loan quite easy to repay even for young professionals.

• Better Credit Score: A good credit score is guaranteed if the current status of the mortgage loan is good. This means that if you have the paid all monthly loan instalments on time, then your name is listed in the good books of bank. Better credit score helps you to get other loans with the same bank or any other bank at lower interest rates. On-time payments of loan instalments improve your credibility in the eyes of creditors and lender banks. In fact, managing to pay off a mortgage loan without any delay and on time improves your score considerably.

Why Mortgage Loans are Ideal Loans?

People remain wary of this loan because they do not want the bank to take custody of their property. However, this is an extreme step and banks too avoid for things to come to this. If the borrower is struggling to pay EMIs, banks also help the borrower find a solution to the problem rather than taking control of the property at the drop of a hat. Most mortgage loans are repaid nowadays with the ECS option wherein the bank withdraws the money automatically from the borrower’s account on a specific date. The only thing the borrower has to do is to ensure the account has enough funds on that particular date. Moreover, factors such as low interest rate, longer tenures, low-risk make these loans far safer than any other loans in the market. In addition, second mortgage loans (which in India are termed as loan against property) can be used for any purpose in addition to buying real estate. This makes this loan ideal for businesses or individuals in need of cash for business or personal reasons.

Who Should Opt for a Mortgage Loan?

A mortgage loan can be taken by an individual as a home loan, as a businessperson as a commercial property loan or both as a loan against property.

It is the ideal way to acquire real estate at a low cost and also save on tax.

The loan is also popular when it comes to any other personal home needs such as home renovation, home expansion, etc. If one takes up a loan against property, there is no restriction on using the proceeds for personal needs. Nonetheless, as the loan requires a mortgage of your property, it may be convenient if you take a personal loan if your need is small. People often take a mortgage loan to take care of the cost of education of their children or to build or buy a second property for commercial or personal needs.

This loan is especially helpful for businesses if the businessperson is in need of emergency cash, since it has better interest rates than a standard business loan. It is advised that a mortgage loan should not be used as risk capital but instead should be used when the borrower knows he would be able to repay the loan before or on the designated time. Such precautions ensures the property stays with the owner and does not pass to the bank.

Eligibility Criterion for Mortgage Loan

Mortgage loan eligibility as usual depends upon the borrower’s credit ratings along with factors like age, income, qualification, number of dependents, spouse’s income (if any), assets, liabilities, and continuity of occupation. Once the loan is approved, it is disbursed either in full or in instalments as instructed by the borrower. The borrower has the option to choose from fixed and floating rate of interest and generally there is an option for part or full prepayment of the loan before the completion of the loan tenure.

The mortgage loan which is extended to the borrower on behalf of the bank is usually based on the market price of the property pledged. It is important is to keep in mind is that banks always hold some amount of margin money based on the market value of the property. This ensures that the banks are always protected against any kind of cyclical fluctuations in the real estate market and drop in prices.

Documents Required for Mortgage Loan

Though the exact list of documents required to get a mortgage loan usually varies from one bank to another, the following is a short list of some of the key documents you need to keep handy when applying for a mortgage loan:

• Government Issued Identity Proof
• Bank acceptable address proof
• For salaried – Salary Slip/Certificate of the past 6 months and bank account statement (past 6 months)
• For self-employed – Past 6 months’ bank statement and certified financial statement for past 3 years.
• Relevant documents of the property that is to be used as collateral for the mortgage.

The above list is not exhaustive and there might be other documents that specific banks require in order to grant a mortgage loan.

Mortgage Loan Interest Rates

A number of factors affect the applicable interest rates of mortgage loans and thus different banks/NBFCs offer mortgage loans at different interest rates and with different processing fees. The following is a list of the key banks and NBFCs that offer mortgage loans, their applicable interest rates and processing fees*:

Name of Bank/NBFC	Applicable Interest Rate	Processing Fees
HDFC Bank	9.65% onwards	Max. Rs. 10,000
Axis Bank	9.75% onwards	0.25% of amount sanctioned
ICICI Bank	9.7% onwards	0.50% of loan sanctioned
Indiabulls	10% onwards	1% of loan sanctioned
DHFL	10.25% onwards	1% of loan sanctioned

Some Other Types of Mortgage Loans

Reverse Mortgage Loan Scheme

Reverse mortgage is a scheme that allows people aged 60 years and above to mortgage their self-occupied home in return for a loan which is paid in instalments or lump sum. The scheme for reverse mortgage was introduced in the year 2007 and had a lot of expectations. However, user interest in this loan scheme has remained relatively low as compared to the real mortgage loan scheme or any other loans primarily because of higher rate of interest and relatively lesser public knowledge.

The reverse mortgage loan scheme is in a way a mirror image of home loans, where you can take a lump sum loan and repay it through instalments. However, the process of repayment is bit complex. You take the loan in instalments and pay in lump sum later. However, interest rate for reverse mortgage scheme is much higher than those for home loans, though not without some valid reasons. For, instance banks have to pay tax on the accrued interest, even though they receive payments from the borrower much later, which increases their overall costs. In a reverse mortgage loan scheme where the borrower chooses to hand over the real estate on their demise to the bank, the banks have to take over the house and sell it. This is a costly and time-consuming process and increases the overall cost of the scheme which is reflected in the interest rate.

Only citizens aged 60 years or more are eligible for a reverse mortgage loan. For married couples jointly taking the loan, one of them should be above 60 years. Also, a reverse mortgage loan is only allowed against a self-occupied residential property. The title of the property should be clear and there should not be any legal or ownership issues with the property. The tenure of reverse mortgage loan varies from one bank to another but the maximum period for which it is allowed is 20 years.

Balloon Mortgage

A balloon mortgage is a financing mechanism where the payments are not fully amortised over the loan term. Sometimes the borrower needs to pay only the interest on the loan. As the loan is not fully amortised, the borrower in this condition needs to pay a large sum of money at maturity to close the loan. In some cases this may be the full principal. As the closure amount is often large, this payment is termed as balloon payment.

A balloon mortgage is similar to a normal mortgage loan. The only difference between the two is that in a balloon mortgage a substantial sum of money, i.e. the balloon payment, needs to be repaid to the lender bank after a certain stipulated time period. The period is usually around 5 to 7 years.

This mechanism is quite popular in the commercial real estate sector. In some cases, the borrower refinances the balloon mortgage with a normal mortgage when the balloon payment is quite high.