Indian economy is quite upbeat in the recent period. Most of the sectors are doing reasonably well considering the unusual times we are going through.
India is one of the few countries in the world which is demonstrating growth of its economy.
Presently contributing 6-7% to the country’s total Gross Domestic Product (GDP), the real estate sector in India is expected to reach a market size of $1 trillion by 2030 and contribute 13% to the country’s GDP by 2025, according to India Brand Equity Foundation (IBEF) recent report. This sector is also the second-largest employment generator after the agriculture sector.
Mortgage lending has a key role to play if India has to realise the projected growth of the real estate sector.
Mortgage lending has increased from 1% of India’s gross domestic product (GDP) in 1990 to almost 11% now, worth approximately Rs27 trillion. The sector has performed admirably even throughout covid-19. In comparison to the previous year, distribution increased by 185% in FY 2021. Banks provided over 65% of these loans, while housing finance companies (HFCs) provided the rest.
But what exactly is a mortgage loan? We will discuss this next.
What is a Mortgage Loan?
A mortgage loan is one in which you secure funds by pledging your immovable property. The property to be mortgaged must be a specific one, i.e. it can be identified by its size, location, boundaries, etc. The collateral for the loan is the property itself. Home loans are also considered mortgages since the property acts as a security for the bank under the home loan contract.
There are many advantages of a mortgage loan. Let’s check them out.
- As compared to other loans, mortgage loans attract lower interest rates.
- Loan tenure can be 15-30 years.
- Generally, the amount of loan is higher than other types of loans and is a large percentage of the value of the property. Even self-employed can avail of modified versions.
- Residential and commercial properties are accepted as collateral. Lenders accept under-construction property, fully constructed property, freehold residential and commercial property as collateral.
- Loan repayment is through equated monthly instalments (EMI).
- Documentation is hassle-free and you can apply for the loan even before selecting the property.
Although the underlying principles of all mortgage loans are the same there are small differences. Based on these differences, there are six types of mortgage loans. Let’s now examine those different types of mortgage loans.
Simple Mortgage
In a simple mortgage, the borrower promises to repay the loan he has borrowed without providing the possession of the mortgaged property. The lender would, however, be free to sell this property to recover his dues if the borrower fails to repay his debt according to the pre-set clauses of the mortgage agreement.
Usufructuary Mortgage
The borrower delivers the property and rights of the mortgaged property to the lender. It retains such possession until the payment of the mortgage is done. The borrower is allowed to receive the rents and profits coming from the property.
In simple words, the borrower has the right to sell the property to the lender of the loan. This enables the borrower to receive an income that can be adjusted with the principal amount and the interest amount of the mortgage loan. However, property papers remain with the borrower.
English Mortgage
In an English mortgage, the personal liability of the borrower is established. The borrower promises the lender to return the loan amount on a specific future date while transferring the property absolutely to the lender. On his part, the lender is obliged to re-transfer the mortgaged property to the borrower on payment of the loan amount. Even though the property might remain legally in possession of the lender, the borrower can still occupy the property under the provisions of an English mortgage.
Mortgage by Conditional Sale
In the case of the mortgage by conditional sale, the borrower sells the property to the lender with a condition that he will have the right to reclaim his property once he pays the loan amount by a pre-set date. Only in case of the inability of the borrower to repay the loan amount in time, the ‘sale’ becomes absolute and the borrower loses his right to reclaim the property.
Mortgage by Deposit of Title Deeds
A person delivers to a lender or his/her agent documents of title to the immovable property to create a security thereon. The transaction is called a mortgage by deposit of title deeds.
This form of mortgaging is also known as an equitable mortgage. Also called an implied or constructive mortgage, an equitable mortgage is basically an oral confirmation from the property owner to the lender about the former’s intent of creating a charge on the property. Even though no legal document is executed or registered in the records of the registrar, it can be created through a notary.
This mortgage does not require registration, and it is the most popular with banks and financial institutions.
Anomalous Mortgage
A mortgage other than any of the mortgages explained so far. It is an anomalous mortgage.
Such a mortgage includes a mortgage formed by the combination of two or more types of mortgages, as explained above. It may, therefore, take various forms depending upon custom, local usage, or contract.
Legal Mortgage & Equitable Mortgage
Based on the transfer of title to the mortgaged property, mortgages are divided into types: (1) legal mortgage, and (2) equitable mortgage.
In a legal mortgage, the legal title to the property is transferred in favor of the lender by a deed.
The deed is to be registered when the principal money is Rs.100 or more. On repayment of the loan, the legal title is re-transferred to the borrower. The method of creating a charge is expensive as it involves registration charges and stamp duty.
An equitable mortgage is affected by the delivery of documents of title to the property to the lender.
The borrower undertakes to grant a legal mortgage through the memorandum of deposit if he fails to pay the mortgage money. This does not require registration of property deeds and minimum paperwork is involved.
Now that we understand different concepts regarding mortgage loans, we can appreciate the scope of home loans as per the Transfer of Property Act, 1882.
Write to us if you have any queries regarding mortgage loans.
