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Mortgage loans are defined as loans that are obtained by real estate purchasers to raise funds for buying property or those that are obtained by existing property owners for some other financial expense by pledging their owned property as collateral for security. Mortgage is one of the most popular forms of loans applicable to real estate and other property buying. Mortgage loan borrowers can both be individuals or business houses. The former may involve a piece of property, flat or land while the latter includes commercial spaces and business premises.
Based on the rate of interest applicable on mortgage loans, they can be divided into two distinct sub-heads
As the name itself signifies, fixed rate mortgage loans are offered to customers at a fixed rate of interest. These type of mortgage loans give a good idea of loan liability to customers even before they have availed a loan. This is because the fixed interest rate could be used to calculate the fixed monthly instalment amount and the customer can then know his/her loan liability for sure.
Variable rate mortgage loans are loans that are offered on variable rate of interest. This interest rate fluctuates with movements in the base rate quoted by the bank which is directly dependent on the repo rate quoted by the Reserve Bank of India. A lot of feedback on variable interest rate Mortgage Loans comes from the performance of the economy and stock market. Measures taken by RBI too are reflective of the status of the economy. So economies where customers are sure about growth and progress are the ones where floating rate mortgage loans flourish better as compared to stagnant or low growth economies. The risk of higher rates and the benefit of lower rates both have the same probability in case of floating rate mortgage loans.
Adjustable rate mortgage loans are those for which the rate of interest is fixed for an initial period of loan and then it correspondingly changes to a higher or a lower rate of interest depending upon the performance of the economy. Some of the points that make these type of mortgage loans more complicated that others are
Listed below is segregation of mortgage loans based on the nature of contract between the lender and the borrower with respect to the terms and clauses of the mortgage loan.
In a simple mortgage loan, the property does not get transferred from borrower to lender but the lender has the rights to sell borrower’s property and retrieve the proceeds for loan reimbursement, in case the borrower falls to pay back the mortgage loan.
In case of usufructuary mortgage, the borrower has the right to sell the property to the lender of the loan and allows him/her to receive an income which can be adjusted against the principal and well as interest amount of the mortgage loan.
Subprime mortgage loans are those that are offered to borrowers with a poor credit history. This means that the interest charged on these loans is greater. This is to compensate the lender in case the loan applicant defaults in repaying the mortgage loan.
In case of an English mortgage the borrower agrees to transfer his/her property absolutely to the lender in case he/she is unable to repay the loan till a particular date. However, once the amount is paid in full, the property is again transferred back to the borrower.
There are other types of mortgage loans also based on the time period of loan which is generally long tenures like 15, 20 and 30 years for mortgage loans in India. Also, loans are segregated based on the payment frequency of loan installment and the amount of loan installment too. Loans can also be segregated as those which allow pre-closure for free and those that charge as fee for pre-closure of mortgage loans.