Loan Against Property (LAP) or mortgage loan is a type of secured loan offered by banks and Housing Finance Companies (HFCs) against commercial or residential property owned by the borrower.
The sum, which is availed by keeping the property as collateral till the loan is completely repaid, can be used by the borrower for different purposes like expanding a business, subsidizing children’s education, meeting medical expenses, and then some.
The greatest loan sum provided under LAP can go up to 70% of the property value. Alongside being savvy, loans against property are reasonably convenient to profit and repay due to the relatively low mortgage interest rate.
What is Mortgage Loan?
A mortgage loan is called the most secured loan in the market. It permits anyone – be it an individual or an entrepreneur – to mortgage his/her property and get money against it with no hazard to the bank.
It is likewise one of the cheaper retail debt items available in the nation. This is because being a collateral-based loan, its rate of interest is typically lower than other debt offerings from banks, for example, personal loans or business loans.
The disbursed sum on the mortgage depends on the value of property. Loan eligibility is determined essentially by the strength of one’s income and the value of the property one possesses.
Like every single other loan, the EMI on a mortgage loan comprises the interest and the head. Once the borrower repays the full head, the loan contract ends with the bank.
Moreover, the bank’s lien on the property ends and the real estate becomes a freehold property. On the off chance that under any circumstances, the loan sum isn’t repaid, the lender bank has the privilege to sell the property and recover its money. This process, called foreclosure, negatively affects one’s capacity 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 gander at what mortgage means under Indian law.
Mortgage Definition Under Indian Law
As per the Transfer of Property Act, 1882, a mortgage is “the transfer of an interest in specific immovable property to secure the payment of money advanced or to be advanced by method of loan and existing or future debt or the performance of an engagement which may rise to a peculiarly liability”.
Taking a gander at this definition, plainly mortgage essentially is a document that transfers interest in immovable property. Over the years, the word has come to refer to likewise the loan that people take against the mortgage. The loan sum can be used for purchasing real estate (which is called a home loan or a commercial property loan) or for other needs including purchasing 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 no other movable asset like gold, jewelry, stocks, etc. The qualification 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 principally refers to taking loan against property (residential or commercial) to meet money related requirements.
Some other focuses that are to be noted from the definition of a mortgage under Indian law:
In the event that one goes by the definition it states that mortgage just involves “transfer of interest”. This implies the ownership of the property remains with the borrower. This ownership is just transferred to the bank in the event of default on loan repayment.
Moreover, the definition additionally implies that one can apply for this loan from any bank by extending the property as a security or collateral. This structures the premise 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 nobody else will have a privilege 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 an earlier right due to a pre-existing mortgage.
Benefits of a Mortgage Loan
A mortgage loan is a famous item as it has quite a few benefits for the borrower just as for the lending bank. For instance, a higher loan sum is generally 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 just as residential properties as security. Aside from these, there are some other attractive benefits of a mortgage loan. Some of these are mentioned here.
- Assessment investment funds for Mortgage Loan to Buy a Home: This is perhaps the most critical advantage of a mortgage loan to purchase a home. The Income Tax Act, 1961, permits borrowers to deduct both the chief just as the interest (up as far as possible) from their income to get to the taxable income for the year. The investment funds are two-overlay, first on the head and second on the interest. The chief paid during the year is eligible for deduction up to Rs. 1.5 lakhs under section 80C. The cutoff on Rs. 1.5 lakhs is inclusive of every single other avenue under section 80C. This means if a borrower has invested Rs. 50,000 in insurance and pension plans, they will in any case be able to benefit Rs. 1 lakhs as deduction for the mortgage head. 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.
- Expense reserve funds for Mortgage Loan for Businesses: A businessperson who has taken a second mortgage (more usually called a loan against property) can guarantee charge deduction on the entire sum paid on the loan on the off chance that he or she can prove that loan was taken to improve the business. The assessment incentive is likewise available for a business loan against some other sort of securities, for example, gold, jewelry, or whatever other assets that he/she possesses. However, on the off chance that you need a large measure of money that runs into crores or lakhs, the main feasible asset that you might be able to offer as security is the property which belongs to you. This is considered as the most secured business loan among a large group of other loan alternatives available because you can benefit it for any purpose running from debt combination to home renovation and furthermore for your kid’s marriage or higher education. The second mortgage loan is a multi-purpose loan.
- Hazard Free Loan: This mortgage loan is granted after keeping the property as a security with the bank. The lending bank does not have to stress over the loan not being repaid, as the bank can sell off the property and get its money back if the borrower neglects to repay the loan sum. The borrower holds the ownership of the property when the loan is active and regains full control when the loan sum is completely repaid. He/she, along these lines, does not have to stress over the property being taken away from him/her with no legitimate reason.
- Easy to Repay: One of the better things about a mortgage loan is that when you take the loan you can repay the sum over a longer tenure as compared to other loans. It very well may be paid in easy regularly scheduled payments over periods up to 25 years. This makes the loan quite easy to repay even for youthful professionals.
- Better Credit Score: A decent credit score is guaranteed if the current status of the mortgage loan is acceptable. This means on the off chance that you have the paid all month to month loan installments on time, then your name is listed in the great books of bank. Better credit score helps you to get other loans with the same bank or some other bank at lower interest rates. On-time payments of loan installments improve your credibility in the eyes of creditors and lender banks. Truth be told, figuring out how to pay off a mortgage loan immediately and on time improves your score considerably.
Why Mortgage Loans are Ideal Loans?
People remain careful about this loan because they don’t need the bank to take care of their property. However, this is an extreme step and banks also dodge for things to come to this. In the event that the borrower is battling to pay EMIs, banks additionally help the borrower discover an answer for the problem rather than assuming responsibility for the property immediately.
Most mortgage loans are repaid these days with the ECS alternative wherein the bank pulls back the money naturally from the borrower’s account on a specific date. The main thing the borrower needs to do is to ensure the account has enough assets on that specific date. Moreover, factors, for example, low interest rate, longer tenures, generally safe make these loans far safer than some other loans in the market.
Likewise, second mortgage loans (which in India are termed as loan against property) can be used for any purpose notwithstanding purchasing real estate. This makes this loan ideal for businesses or people in need of money for business or personal reasons.
Who Should Opt for a Mortgage Loan?
A mortgage loan can be taken by a person as a home loan, as a businessperson as a commercial property loan or both as a loan against property.
It is the ideal method to acquire real estate requiring little to no effort and furthermore save on charge.
The loan is likewise well known when it comes to some other personal home needs, for example, home renovation, home expansion, etc. In the event that one takes up a loan against property, there is no restriction on utilizing the proceeds for personal needs. Nonetheless, as the loan requires a mortgage of your property, it might be convenient on the off chance that you take a personal loan if your need is little. People often take a mortgage loan to take care of the expense of education of their children or to manufacture or purchase a second property for commercial or personal needs.
This loan is especially helpful for businesses if the businessperson is in need of emergency money, since it has better interest rates than a standard business loan. It is advised that a mortgage loan ought not be used as hazard capital yet instead ought to be used when the borrower realizes he would be able to repay the loan before or on the designated time. Such precautions ensures the property remains with the owner and does not go to the bank.
Eligibility Criterion for Mortgage Loan
Mortgage loan eligibility as common depends upon the borrower’s credit appraisals alongside factors like age, income, capability, number of dependents, spouse’s income (assuming any), assets, liabilities, and coherence of occupation. Once the loan is approved, it is disbursed either in full or in installments as instructed by the borrower. The borrower has the alternative to choose from fixed and drifting rate of interest and generally there is a possibility 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 normally based on the market price of the property pledged. It is significant is to keep as a top priority is that banks consistently hold some measure of edge money based on the market value of the property. This ensures the banks are constantly protected against any sort of patterned vacillations in the real estate market and drop in prices.
Documents Required for Mortgage Loan
Despite the fact that the exact list of documents required to get a mortgage loan for the most part varies starting with one bank then onto the next, coming up next is a short list of some of the key documents you need to keep convenient when applying for a mortgage loan:
- Government Issued Identity Proof
- Bank acceptable address confirmation
- For salaried – Salary Slip/Certificate of the previous a half year and bank account statement (recent months)
- For self-employed – Past a half year’s bank statement and certified fiscal summary for recent years.
- Relevant documents of the property that will be used as collateral for the mortgage.
The above list isn’t exhaustive and there may be other documents that specific banks require so as to concede a mortgage loan.
Some Other Types of Mortgage Loans
- Reverse Mortgage Loan Scheme
Reverse mortgage is a scheme that permits people aged 60 years or more to mortgage their self-occupied home in return for a loan which is paid in installments or singular amount. The scheme for reverse mortgage was introduced in the year 2007 and had a great deal of expectations. However, user interest in this loan scheme has remained relatively low as compared to the real mortgage loan scheme or some other loans fundamentally because of higher rate of interest and relatively lesser open knowledge.
The reverse mortgage loan scheme is in a manner a perfect representation of home loans, where you can take a singular amount loan and repay it through installments. However, the process of repayment is bit complex. You take the loan in installments and pay in single amount later. However, interest rate for reverse mortgage scheme is a lot higher than those for home loans, however not without some legitimate reasons.
For, instance banks have to pay charge on the accrued interest, even however they receive payments from the borrower a lot later, which increases their overall expenses. 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 an expensive and time-devouring process and increases the overall expense of the scheme which is reflected in the interest rate.
Just citizens aged 60 years or more are eligible for a reverse mortgage loan. For married couples mutually taking the loan, one of them ought to be above 60 years. Additionally, a reverse mortgage loan is just allowed against a self-occupied residential property. The title of the property ought to be clear and there ought not be any legal or ownership issues with the property. The tenure of reverse mortgage loan varies starting with one bank then onto the next yet the greatest period for which it is allowed is 20 years.
- Inflatable Mortgage
An inflatable mortgage is a financing mechanism where the payments are not completely amortized over the loan term. Sometimes the borrower needs to pay just the interest on the loan. As the loan isn’t completely amortized, the borrower in this condition needs to pay a large total of money at development to close the loan. In some cases this might be the full head. As the closure sum is often large, this payment is termed as inflatable payment.
An inflatable mortgage is like an ordinary mortgage loan. The main difference between the two is that in an inflatable mortgage a generous total of money, i.e. the inflatable payment, needs to be repaid to the lender bank after a certain stipulated time period. The period is as a rule around 5 to 7 years.
This mechanism is quite well known in the commercial real estate sector. In some cases, the borrower refinances the inflatable mortgage with an ordinary mortgage when the inflatable payment is quite high.