What is Mortgage?
A mortgage is a type of loan specifically designed for purchasing, building, or renovating real estate, where the property itself serves as collateral. In simple terms, you borrow money from a lender typically a bank or a housing finance company and agree to repay it over a fixed period through regular installments, known as Equated Monthly Instalments (EMIs). If you fail to repay the loan as agreed, the lender has the right to take possession of the property, sell it, and recover the outstanding amount. In India, mortgages are governed by the Transfer of Property Act, 1882, which defines the rights and responsibilities of both borrowers and lenders. Mortgages enable individuals to buy homes without having the full purchase price upfront, making homeownership accessible to a broader section of the population.
Types of Mortgages
In India, the most common mortgage products include:
- Home Purchase Loan: This is the standard mortgage where funds are provided to buy a ready or under-construction residential property.
- Home Construction Loan: Funds are disbursed in stages based on construction progress, allowing applicants to build on their own land.
- Plot Loan: This loan helps purchase land. Since land cannot generate rental income like a completed property, lenders often have stricter criteria and a lower loan-to-value (LTV) ratio.
- Balance Transfer Loan: Borrowers refinance existing home loans with a new lender offering a lower interest rate or better terms, thereby reducing their EMIs or tenure.
- Loan Against Property (LAP): Here, an existing property residential or commercial is mortgaged to raise funds for purposes other than buying a home, such as business expansion or education.
Types of Mortgages Depending on Rates
Mortgages can also be classified by how their interest rates are structured:
- Fixed-Rate Mortgage: The interest rate remains constant throughout the loan tenure. This offers predictability in EMIs but may start at a slightly higher rate.
- Floating-Rate (Variable) Mortgage: The rate changes periodically based on a benchmark, usually the lender’s Marginal Cost of Funds based Lending Rate (MCLR) or the RBI’s repo rate. Borrowers may benefit when rates fall, but EMIs can rise if rates increase.
- Hybrid Adjustable-Rate Mortgage (ARM): Combines a fixed rate for an initial period (e.g., 3-5 years) with a floating rate thereafter. This balances initial stability and potential long-term savings.
How Does Mortgage Work?
When you apply for a mortgage, the lender evaluates your creditworthiness and the property’s value. Once approved, you sign a mortgage deed that pledges the property as collateral. The lender then disburses the loan amount either as a lump sum (for purchase loans) or in stages (for construction loans).
You repay the loan in EMIs, which consist of principal and interest components. In the early years, a larger portion goes towards interest; towards the end, more goes to principal. If you miss payments or default, the lender can initiate foreclosure procedures, sell the property at auction, and recover dues. After full repayment, the lender releases its claim on the property, and you receive a “No Objection Certificate” (NOC) and “Release Deed,” clearing the mortgage charge.
Features and Benefits of Mortgage
- High Loan-to-Value Ratio: Banks in India typically offer up to 90% of the property’s value, reducing the upfront cash requirement.
- Long Tenure: Mortgages can stretch up to 30 years, allowing EMIs to be more affordable.
- Tax Savings: Under Sections 80C and 24(b) of the Income Tax Act, you can claim deductions on principal repayment (up to ₹1.5 lakh) and interest paid (up to ₹2 lakh), lowering your tax liability.
- Flexible Repayment: Many lenders offer options to prepay part of the loan without penalty or to switch between fixed and floating rates once during the tenure.
- Lower Interest Rates: Compared to unsecured loans, mortgage rates are typically lower because the loan is secured by real estate.
- Financial Discipline: Regular EMIs ensure systematic savings and instill budgeting discipline over the long term.
The Mortgage Process
- Research and Pre-Qualification: Begin by comparing lenders’ interest rates, processing fees, and customer service. Most banks allow you to check eligibility online using basic details like age, income, and loan amount desired.
- Property Selection: Identify the property you wish to purchase or construct. Ensure it has clear title and necessary approvals from municipal authorities or housing boards.
- Application Submission: Fill out the mortgage application form, either online or at the branch. Provide detailed information about yourself, co-applicants (if any), and the property.
- Document Verification: The lender verifies your identity, income, credit history, and property documents. They may order a survey or valuation to confirm the market value and legal status of the property.
- Loan Sanction: Upon successful verification, you receive a sanction letter outlining the approved loan amount, interest rate, tenure, EMI schedule, and conditions. Review it carefully.
- Agreement and Stamp Duty: Sign the loan agreement and mortgage deed on non-judicial stamp paper. Pay stamp duty and registration charges at the local sub-registrar’s office to record the mortgage legally.
- Disbursement: The lender disburses the funds. For ready properties, it is usually a lump sum; for under-construction properties, disbursement is linked to construction milestones.
- Repayment: Begin paying EMIs as per the schedule. Maintain clear records and set up auto-debit to avoid missed payments.
Eligibility Criteria for Mortgage in India
- Age: Borrowers typically must be between 21 and 65 years old at loan maturity.
- Income: Salaried individuals should have a stable monthly income; self-employed applicants need at least two years of business vintage and audited financials.
- Credit Score: A CIBIL or Experian score of 750+ improves approval chances and secures better rates.
- Employment Stability: A minimum of two years in the current job or business is often required.
- Property Type and Location: Lenders prefer approved housing projects. Loans for out-of-town or unapproved properties may have stricter criteria.
- Loan-to-Value Ratio (LTV): Banks typically finance up to 80-90% of the property’s value, so you must arrange the balance from your own funds.
- Existing Liabilities: Total Debt-to-Income ratio should ideally be below 50%; banks assess all existing EMIs and liabilities before approving a new loan.
What Factors Determine Your Mortgage Approval?
Credit Score and History: A strong credit history shows you have repaid past loans on time. Missed or late payments can lower your score and harm approval chances.
Income and Employment: Stable, sufficient income assures the lender you can meet EMIs. Salaried applicants submit Form 16 or salary slips; self-employed need income tax returns and balance sheets.
Loan-to-Value (LTV) Ratio: Higher LTV means a higher loan amount relative to property value. Exceeding the lender’s LTV limit typically requires a larger down payment.
Property Valuation and Legal Clearances: The lender conducts a technical and legal valuation to ensure the property is worth the loan amount and free of disputes.
Debt-to-Income Ratio: This ratio compares your monthly obligations against your income. A lower ratio (<50%) enhances your approval odds.
Age and Tenure: Older borrowers may get shorter tenures. Lenders cap the retirement age or tenure end, affecting the maximum loan length.
How to Get Mortgage?
Assess Your Finances: Check your credit score, calculate how much you can afford, and estimate EMIs using online calculators.
Choose the Right Lender and Product: Compare interest rates, processing fees, prepayment charges, and customer reviews across banks and housing finance companies.
Get Pre-Approval: Obtain a pre-approved loan estimate, which strengthens your negotiating power with sellers and builders.
Gather Documents: Prepare identity proofs, income proofs, property papers, and bank statements well in advance to speed up processing.
Submit Application: Apply online or at the branch. Track your application status regularly and respond promptly to any queries.
Complete Legal Formalities: Sign the mortgage deed, pay stamp duty, and register the property. Only after registration will the bank disburse the funds.
How Does Mortgage Impact Credit Score?
Your mortgage has a major influence on your credit profile:
- Timely Payments: Regular EMI payments improve your credit score over time, as they demonstrate reliability.
- Credit Mix: A mortgage adds to the diversity of your credit portfolio, showing lenders you can handle long-term liabilities.
- Credit Utilisation: Since mortgages are installment loans, they do not affect your credit utilisation ratio like credit cards do.
- Missed Payments: Even a single EMI default can lead to a significant dip in your score, making future borrowing more expensive or difficult.
How to Compare Mortgages?
When comparing mortgage offers, look at:
- Interest Rate (APR): Compare both the headline rate and the Annual Percentage Rate, which includes processing fees and other charges.
- Processing Fees and Other Charges: A low interest rate may be offset by high processing or legal fees.
- Prepayment and Foreclosure Charges: Some lenders levy penalties if you pay off the loan early or switch the rate type.
- Loan-to-Value (LTV) Offered: A higher LTV reduces your upfront cost but may come with stricter conditions.
- Tenure Flexibility: Longer tenures lower EMIs but increase total interest paid.
- Customer Service and Turnaround Time: Read reviews or talk to existing customers about how quickly the lender processes applications and disburses funds.
What Does Fixed vs. Variable Mean on a Mortgage?
- Fixed-Rate Mortgage: Your interest rate remains the same for the entire loan tenure, making EMIs predictable. This is ideal if you value stability and expect rates to rise in the future.
- Variable (Floating)-Rate Mortgage: Your rate is linked to a benchmark (like MCLR or repo rate) and can change periodically. If benchmark rates fall, your EMIs decrease; if they rise, your EMIs increase.
- Benefits of Fixed: Budget-friendly, shields against market volatility.
- Benefits of Variable: Often starts at a lower rate than fixed offers, potential savings if rates decline.
How Many Mortgages Can I Have on My Home?
In India, you can generally have only one first mortgage on a property at any given time. However, after fully repaying one mortgage, you may pledge the same property again for another loan. Some lenders allow a “second charge” or top-up loan against an already mortgaged property, but this is treated separately from the primary mortgage. The aggregate loan amount must still comply with the lender’s maximum Loan-to-Value ratio.
Can Anybody Get a Mortgage?
While mortgages are widely available, not everyone qualifies automatically. You must meet the lender’s eligibility criteria such as minimum age, stable income, and adequate credit score. Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) can apply under specific schemes with additional documentation. Self-employed individuals need to demonstrate consistent business income through audited financials. Those with poor credit histories or irregular income may face higher interest rates or require a co-applicant to secure approval.
Why Do People Need Mortgages?
Real estate is typically the most expensive purchase most people make in their lifetime. Few can pay for a home or land entirely in cash. Mortgages allow buyers to:
- Spread Cost: Pay over decades rather than one lump sum.
- Leverage Savings: Purchase a more valuable property than their current savings allow.
- Build Equity: Gain ownership gradually while living in or renting out the property.
- Enjoy Tax Benefits: Reduce taxable income through deductions on interest and principal payments.
Why is It Called a Mortgage?
The term “mortgage” comes from Old French mort gage, meaning “dead pledge.” The “dead” implies that the pledge ends either when the debt is fully paid (the pledge “dies”) or the property is taken by the lender through foreclosure. Under Indian law, the mortgage concept was adopted through British legislation, and today it denotes the legal charge a lender holds over a borrower’s property until the loan is repaid.
Documents Required for Mortgages
When applying for a mortgage in India, you typically need:
Identity Proof: Aadhaar card, PAN card, passport, voter ID, or driver’s license.
Address Proof: Utility bills, Aadhaar card, passport, or rent agreement (if applicable).
Age Proof: Birth certificate or school leaving certificate (if age is not on other ID).
Income Proof:
- Salaried: Latest salary slips, Form 16, and bank statements for the last six months.
- Self-Employed: Income tax returns (last two years), profit and loss statements, and audited balance sheets.
Property Documents: Title deed, sale agreement, approved building plan, property tax receipts, and NOC from the society or builder.
Bank Statements: Last six months’ statements for all active accounts.
Passport-Size Photographs: Typically, two to four recent photos.
Other: Processing fees cheque, cheque for stamp duty/registration, and any lender-specific forms.