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Why Do Banks Prefer Mortgage Loans?

September 30, 2021
in Business
Why Do Banks Prefer Mortgage Loans?

If you want a secured loan that banks and financial institutions prefer to disburse, Mortgage Loans should be your pick for the purpose. Banks, Loan distributors, and financial institutes prefer mortgage loans because you pledge assets and property to get this loan. Financial institutes can redeem their money in case of default; hence there are minimal chances of loss.

In addition, mortgage loan applicants get desired loan amount with lesser formalities. So, it is a win-win situation for both lenders and borrowers.

To understand better, we will discuss mortgage loans, types, and more in the following paragraphs.

What are Mortgage Loans?

A mortgage loan is a secured collateral-based loan where borrowers can get funds against assets and properties. The lender keeps your property documents as collateral until the loan account closes. This loan is disbursed against fixed assets such as a house, land, or commercial property.

The lender enjoys legal rights of the property for the period of the loan. Your lender has all the rights to seize, sale or auction the property in the case of default.

Types of Mortgage Loans in India

Loan against Property

A loan against property is the most common form of a mortgage loan. You can borrow funds against property documents for residential and commercial purposes. Loan distributors, banks, and financial institutions keep your documents as collateral during the loan tenure.

You can repay LAP in equated monthly instalments as agreed with the lender and mentioned in the loan document. You can calculate loans against property EMI through the websites of several banks and financial institutions. Such facilities help in making informed and confident decisions. Generally, tenure for the LAP is fifteen years.

Mortgage for Commercial Purpose

Commercial purpose mortgage loan is for businesses and corporates. Banks and financial institutions offer commercial purpose loans for buying or construction shops, commercial complexes, and offices.

Loan distributors and banks decide interest rates according to RBI guidelines and negotiations with the borrower.

Commercial purpose loan has the condition to utilize only for commercial purposes. You cannot take this loan for home building or renovation.

Lease Rental Discounting

Mortgage loan on the leased-out property is very popular among people these days. In this type of Mortgage, you can lease your residential and commercial property in part or entirely. Loan distributors and banks lend money based on monthly rental and the value of the property. They convert monthly rental income into EMIs for the payback of the loan.

Financial institutions keep your property documents and lease agreement till the end of the loan tenure. Given the nature of the arrangement, you can get these mortgage loans comparatively faster without too many formalities.

Second Mortgage Loan

With fixed assets as the collateral, financial institutions grant a second mortgage loan on the existing loan. It shows their preference and its importance for their strong accounting books.

To understand clearly, suppose you have a loan on a fixed asset such as your house, shop, or non-agricultural land. You can ask for an additional loan on the same property for personal requirements.

This type of mortgage loan is also known as a top-up loan. Loan distributors and banks assess your credit score, loan repayment performance and consider your application for a second mortgage loan.

About repayment, the borrower needs to pay EMIs for the first and second Mortgage together until their respective tenure ends.

Reverse Mortgage

Reverse Mortgage is a comparatively new concept in India. This type of Mortgage is tailor-made for senior citizens, especially people with no or inadequate source of income but having land, house and other fixed assets.

Reverse Mortgage works opposite to the LAP. In this Mortgage, senior citizens pledge their property with the financial institutions and get monthly fixed income in return. This is an excellent option for senior citizens in their advanced age.

A reverse mortgage helps banks and financial institutions to utilize unused properties and boost their financial position.

In case of demise, the lender can sell the property and deduct the amount paid to the person over the years. The residual amount is given back to the legal heirs of the deceased person.

Types of Interest Rates for Mortgage Loans

Banks and loan distributor companies launch lucrative offers from time to time for mortgage loans. You can pay back mortgage loans through fixed and floating interest rates.

Fixed Interest Rate

Banks and loan distributors offer fixed interest rates for shorter tenures and remain the same during the loan period. Generally, you will not get fixed interest rates for long term mortgage loans.

Floating Interest Rate

Interest rates are determined according to market trends. The changes happen periodically and are directly linked to MCLR or Marginal Cost of Funds based Lending Rate.

Crucial Features of Mortgage Loans

  • Loan distributors and banks have a set of guidelines for accepting properties for the loan. You cannot get a mortgage loan on all types of assets.
  • Lenders prefer fully constructed homes and commercial properties.
  • The property for the Mortgage should have marketable value. The borrower should be the owner of the freehold property, who have the right to transfer the property.
  • You can customize mortgage loans as per requirements. The tenure can extend up to thirty years and payback in equated monthly instalments.

Given its secured nature, banks and financial institutions provide mortgage loans for multiple purposes such as medical emergencies, expenses for higher education, wedding, business, home renovation, etc. Apply for your mortgage loan and never compromise on your dreams ever.

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