Today, when it comes to meeting important life goals involving high-value expenditure, one often resorts to external financing to ease the monetary aspect. Such goals can vary greatly from making house property purchase, providing higher education to your child, travelling overseas, meeting wedding expenses, and the likes.
Now, while various dedicated loan options are available for meeting these expenses, they often come as short-term advances with comparatively high rates of interest and other features that might not go right in the bigger scheme of finances. Thus, when it comes to long-term financing, a mortgage loan is a great financing avenue to look forward to.
These advances are designed to fulfil your big-ticket funding needs conveniently without you having to strain your finances. Let’s know in detail about what this loan type comprises for a better understanding.
Meaning of Mortgage
Mortgage loan is an umbrella term, wherein the functional feature of the advance is defined by the term ‘mortgage’. Mortgage refers a charge that keeps a fixed property as collateral against the financing extended, whereby such property is liable to be auctioned by the lender for loan recovery in case of total or partial repayment default.
The loan thus refers to a financial arrangement wherein a lending institution agrees to extend funding to an applicant against which a mortgage is created on the residential or commercial property extended as collateral. This also establishes the loan option as a secured advance, which subjects it to various benefits that the borrower can enjoy.
Types of Mortgage Loan
In the Indian financial market, mortgage loans are primarily available in 2 different types as explained below.
Loan against property: These are advances that come with zero restrictions to end-use. You can thus utilise a loan against property to fulfil any big-ticket financing need of your choice, be it personal or professional. Especially when it comes to business expenditure involving significantly high-value funding, a loan against property can be especially suitable.
Eligible individuals can easily avail a loan against property running into crores for convenient fulfilment of the required financing need. Any fixed residential or commercial property can be utilised as a mortgage to raise necessary funding through a loan against property arrangement.
Home loan: As the name suggests, these are mortgage advances that are specifically designed to fulfil the financing needs of individuals related to house property purchase. These are high-value advances and can run into crores for individuals with the right eligibility parameters.
Unlike a loan against property, a home loan is provided only against a residential house property. In fact, the mechanism of this loan option differs significantly from the former. A home loan is availed against the value of a new house property that you are seeking to buy.
Herein, once you have selected a suitable house for purchase, you need to make a percentage of its price as down payment. Based on this amount, the house is allotted to you and the certificates so received serve as documents to raise rest of the financing as a home loan.
The Concept of Loan to Value (LTV) Ratio in Mortgage Financing
LTV or Loan to Value ratio is a concept in mortgage loans, especially all secured advances, that defines the maximum loan amount a lender would be ready to extend to someone. It defines the maximum cap of the loan and subjects your total loan availability accordingly. It is expressed in percentage, whereby an LTV of 70% would indicate that depending on the current market price of the property being mortgaged, a lender is ready to extend up to 70% as advance.
Thus, if the property’s current market value is Rs.1 Crore and LTV set by the lender is 70%, the total loan availability will be capped at Rs.70 Lakh and cannot exceed it in any case. The LTV is determined based on various internal risk factors and other external ones depending on the borrowing applicant’s profile. It differs from one lender to another and is also variable based on the type of secured loan you are availing.
Even in the case of mortgage loans, LTV would differ for the same lender based on whether you are availing a home loan or a loan against property. In the case of home loans, LTV commonly varies between 70% and 95% of the property’s current market price. For loans against property, LTV can hover between 65% and 85% of the property’s value.
Depending on the expenditure associated with your financing need, you can choose between a home loan and loan against property and utilise the underlying equity of your asset to raise necessary funding.
Make sure to consider your choice of lender based on a thorough market comparison to choose the right mortgage loan for you. Such comparison should be based on the interest rate levied, features and facilities offered, repayment options, and the likes. Also, fulfil all eligibility requirements and keep documents ready before applying for easy approval of your mortgage advance.