A mortgage loan offers the borrower an opportunity to generate additional income from an otherwise idle property
In life, we come across certain situations, from where we cannot avoid some expenses. Some of these expenses include business expansion, marriage, medical emergencies or higher education. One such solution to meet these needs would be to avail a mortgage loan.
What is mortgage loan?
Mortgage loan refers to loan against property which would be a residential house, non-agricultural land or commercial shop.
In case of a residential or commercial property, the house should be fully constructed. It should be a freehold property and have marketable value. It should be free from all encumbrances—free from mortgage or other charge on property.
A freehold property is a property which gives full legal rights to the owners to live and use the property. Most property in India is freehold, which means that ownership is transferable. A freehold property owner has the right to sell, transfer and repair the property. The freehold properties give more right and responsibility to the owner.
A mortgage loan grants the borrower an option to generate additional income from an otherwise idle property. Mortgage loan is specifically designed for an individual who already owns a property and is in need of borrowing some finances. But the property against which he is taking up the loan amount must be free from any encumbrance, i.e., it is not offered as security for any other purpose. Under this, the borrower pledges collateral in the form of property against the loan amount. The borrower still maintains the right of ownership of the property and when he repays the total loan amount on or before the tenure of the loan, he gets back his property.
Mortgage loan can be taken for various funding requirements. But while availing this loan, one needs to state and assure that the loan amount is not being taken for illegal purpose or indulging in any speculative activity.
Mortgage loans are offered by banks such as Bank of Baroda, Central Bank of India, Union Bank of India, State Bank of India, Punjab National Bank among others.
Types of loan
Mortgage loans are of two types: Term loan and overdraft loan. Both the loans are offered against the security of the borrower’s immovable property. In case of overdraft loan, the borrower has an option to withdraw money as per his need and save on interest cost. For instance: The bank has approved a total loan of Rs. 5 lakh for the borrower, of which he needs just Rs. 1 lakh, then the interest rate will be charged on only Rs. 1 lakh of the total loan amount.
In an overdraft loan, the total loan is disbursed in installments depending on the borrower’s requirement. Interest is charged only on the loan amount taken by the borrower and not the total loan. The borrower has to open an account in case of overdraft loan. The account is also called running account. The overdraft facility is available for one year and is to be reviewed annually.
However, the interest rate charged on an overdraft loan is marginally higher than that charged on a term loan. Overdraft loans carry an additional 0.5% interest rate over and above a term loan.
Who can avail of a loan?
Mortgage loans can be availed by individuals, salaried employees, self-employed, proprietary firms, partnership firms, professionals and businessmen. Loans can be applied by individuals and by co-applicants. Owners of the current property, in respect of which the loan is being sought, will have to be co-applicants. However, the co-applicants need not be co-owner.
Interest rate on mortgage loan is normally charged on variable basis.
The loan amount depends on the market value of the property and on the borrower’s income. The property—prime security with the bank—is valued by the bank approved valuers and the loan amount is usually 50% of the market value of the property. For example: If the property value is Rs. 10 lakh, then the bank may approve the loan amount of Rs. 5 lakh for the borrower. The bank also considers the income criteria of the borrower which is three times of the last three years annual income.
The minimum loan amount is Rs. 1 lakh, while the maximum loan amount varies from bank to bank.
The processing fee is usually 1% of the sanction limit of the loan amount. Other charges include lawyer’s fees and property valuation charges. These charges are borne by the borrower.
The documents include last three years annual income statement of the borrower, last three years income tax returns and property papers such as original sale deed, encumbrance certificate, property tax receipt, last six months bank statement and other relevant documents as asked by the bank.
An encumbrance certificate is needed in a property transaction as an evidence of free title and ownership. It is a document issued by the registration authorities.
The tax receipts include maintenance, water tax, municipal tax and any such taxes. If the property is a self-constructed property, the bank would also ask for an approved plan.
The other documents include proof of identity (copy of passport, ration card, voters ID or driving licence).
Tenure and repayment
The maximum tenure of the loan repayment is generally seven years. Repayment to the lender is done on equated monthly installments basis through electronic clearing service mandate or post dated cheques. The EMI comprises principal and interest rate.
Any default in repayment will attract penal interest of around 2% per annum over and above the above rate of interest on the balance outstanding.
What happens if the loan is not repaid?
The property can be repossessed by the lender to recover its outstanding loan amount. To allow recovery of the loan amount, courts can order foreclosure (sale in the open market to recover dues) of the property.