Obtaining a loan is an effective way to meet a host of financial obligations that demands a substantial sum of money. In this regard, a mortgage loan is a cost-effective solution. Although this credit option requires security, it offers high-value funds along with an array of benefits against low-interest rates.
Keep reading to understand the meaning of mortgage loans and its different types in detail to make an informed choice.
7 Types of Mortgage loans based on Interest Rate
Prospective applicants should go through the 7 different mortgage loan types to understand the inherent aspects of each of the credit options and meet their financial obligations seamlessly:
- Loan against property
A loan against property is among the most-preferred secured credit options offered against a high-value property as security. Lenders sanction the loan once the applicants mortgage their residential or commercial property, including self-occupied, rented, or even a self-owned plot of land.
Lenders approve an amount that is equivalent to the current market value of the asset. Furthermore, it does not have any end-use restrictions and can be utilised for any big-ticket expenses such as loan against property for home renovation, education, wedding, vacation etc. However, individuals should understand the charges on loan against property before applying for one.
Several reputed NBFCs extend pre-approved offers on mortgage loans such as loan against property, home loan etc. This expedites the lending process and brings down the processing time. To check their pre-approved offers, individuals need to enter their names and contact details.
- Simple interest mortgage loan
Simple interest is a fixed rate depending on the loan amount. Unlike other mortgage loans, lenders calculate interest rates daily instead of monthly. Further, lenders evaluate interest by dividing the rate by 365 days and then multiplying it with the remaining mortgage balance. However, if borrowers repay a day late, the amount owed will increase because of the accrued interest.
- Fixed-rate mortgage loan
This mortgage loan is secured by either a residential or commercial property. Before disbursing this type of credit, lenders and debtors agree to the interest rate, which remains the same throughout the loan term. That means, once locked in, this interest rate does not fluctuate based on any market conditions.
- Floating or variable rate mortgage loan
It refers to another type of mortgage loan where the interest rate is not fixed and fluctuates periodically as per the market conditions, reflecting the prevailing interest rates. Borrowers mostly prefer floating mortgage loans to anticipate a future decline in interest rates. Thus, it is structured with a variable-rate margin and an indexed rate before approval.
- Adjustable-rate mortgage loan
Similar to a floating-rate mortgage loan, with an adjustable-rate mortgage, the interest rate remains fixed for a certain period. However, the interest rate on the outstanding balance resets periodically, which can be yearly or monthly. This mortgage loan has caps to determine how much interest rate and/or payments can rise yearly or throughout the loan tenure.
- Usufructuary mortgage loan
According to the Transfer of Property Act, in a usufructuary mortgage, a borrower gives possession of a property to a lender for the latter to utilise it for financial gains. A borrower also authorises the lender to retain possession until the repayment of the mortgage loan. However, throughout this loan tenor, the title deed of the property remains in the possession of the borrower.
- English mortgage loan
In an English mortgage loan, a lender is liable to take possession of a mortgaged property if a borrower defaults on payment. Further, Section 69 of the Transfer of Property Act, 1882, grants a power of sale to lenders without any judicial intervention. This makes it essential for borrowers to be aware of the simple ways to repay existing loans without defaults.
To sum up the article on Cofi Magazine 0Nonetheless, besides the meaning of mortgage loan and its types, individuals must factor in various aspects such as mortgage size, tenor, repayment capacity, risks and others to efficiently manage their finances when borrowing.