Dear candidates, are preparing for bank or insurance exams? Then it is necessary to know certain financial terms and their functions in the banking field. Here we are getting an idea about Mortgage Loans and the types of Mortgage loans, especially in India. Before getting into all such details let’s know what a Mortgage loan is.
The word ‘mortgage’ means that is an agreement under which a person borrows money to buy property, especially a house or any other, and the lender may take possession of the property if he/she fails to pay back the money.
A mortgage loan is a type of secured loan that allows a person to avail funds by providing the lender with an asset as a pledge. That asset will be under the control of the lender until the borrower repays the loan. The loan that one receives is secured on the pledge through a process called Mortgage Origination. This shows that legal support is backing up the lender, in case the borrower fails to pay back the loan.
There are two sides to this process, a mortgage borrower and a lender. The mortgage borrower can be a person who owns a property or business that mortgages the commercial property. The lender will be the financial institutes such as banks, credit unions, or building society. The loan arrangements are made either directly or indirectly. Individuals and businesses use mortgages in order to buy real estate without paying the whole amount of the purchase. The mortgage borrower pays back the loan along with the interest over a specified period of time until they own the property back.
If a person or business wants to borrow the loan, they apply it to one or more lenders. As per the application, the mortgage lenders ask for evidence that shows the borrower is capable of paying back the loan with interest. The evidence that can be presented is a bank statement or proof of current employment, etc. The lenders will run a credit check in order to know the borrower’s financial capacity. If the lender is approved by the application, they lend money under fixed interest rates.
Types of Mortgage Loans in India 2022
There are mainly six types of mortgage loans in India: Loan Against Property, Commercial Purchase, Lease Rental Discounting, Second Mortgage Loan, Reverse Mortgage, and Home Loan.
- Loan Against Property, also known as LAP
LAP is mainly offered for commercial and residential properties. The properties that belong to the borrower are pledged in order to receive funds from the lenders. The property that is pledged will be under the control of the lender until the loan is repaid. Such loans are paid on an EMI basis. The mortgage borrower can use up the fund for their personal or official needs. The tenure of these loans is up to 15 years.
- Commercial Purchase
Commercial Purchase loans are mainly offered to businessmen or entrepreneurs. The loan is used to buy commercial properties for commercial purposes. The interest rates are quite competitive. The funds received through a loan cannot be used for any other personal needs. It can only be used for buying properties.
- Lease Rental Discounting
The mortgage loans are taken against the leased property is known as Lease Rental Discounting. The loan amount is given on the basis of the monthly rent of that leased property. The tenure and loan amount depends on the time period till the property is being leased.
- Second Mortgage Loan
The loans are funded for a property that is already under a loan. It can be used for personal needs. It is also known as a Top-up Loan. The lender provides an additional required loan based on the borrower’s early repayment of the loan.
- Reverse Mortgage
This type of loan has been introduced in India recently. It is a special loan for senior citizens. The Reverse Mortgage works exactly the opposite of Mortgage loans. It works as the borrower pledge the property to the lender. Then the lender will pay a fixed amount of income to the senior citizen. When the citizen dies, the pledged property will be sold by the lender. Deducting the loan amount that was paid to the senior citizen, the residual amount will be given back to the legal heirs.
- Home Loan
The consumers can apply for small, medium, and large-sized home loans since the interest rates are competitive, the durations are comfortable and there will be a tax benefit. The fund only is used for renovating a house or to buy a property with an under-construction building or to purchase land or build a house. They cannot be used for any other personal or official purposes. These are the main types of mortgage loans.