What is a mortgage? Everything you need to know

A mortgage is a financial arrangement where immovable property is pledged as collateral to secure a loan. While often confused with home loans, mortgages serve broader purposes, from buying property to funding education or business needs. Defined under the Transfer of Property Act, 1882, mortgages come in various types, each catering to specific financial situations. In this article, we explore what a mortgage is, how it works, its types, and key differences from home loans, providing a comprehensive guide for borrowers to make informed decisions.

What is mortgage? 

When you provide an immovable property as a security for a loan, this arrangement is known as mortgage.  A mortgage refers to offering a guarantee or collateral against a loan.

Section 58 (a) of the Transfer of Property Act, 1882, defines mortgages as ‘the transfer of an interest in specific immovable property for the purpose of securing the payment of money by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability’.

In his book, ‘The Law of Mortgages in India’, Rashbehary Ghosh says mortgages have two aspects – ‘In the first place, it is a promise by the debtor to repay the loan and as such, it is a contract which creates a personal obligation. Secondly, it is also a conveyance, since it passes to the creditor a real right in the property pledged to him. However, the right created in the land is only an accessory right, intended merely to secure the due payment of the debt’.

Mortgage meaning in Hindi: The English term mortgage is the same as गिरवी, बंधक and रेहन in Hindi.

See also: Key facts about the Transfer of Property Act, 1882

All about relinquishment deed

Types of mortgage

Even though the basic idea behind all mortgages remains the same, their types vary because of the way an interest in the property is transferred to secure a loan. Based on this differentiation, mortgages have been divided into six different types. These include:  

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Simple mortgage

In a simple mortgage, the borrower promises to repay the loan he has borrowed by a bank or any other money lending agency, 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.  

See also: Know about house valuation

Usufructuary mortgage

In an usufructuary mortgage, the borrower gives possession of the mortgaged property to the lender and authorises him to retain such possession until payment of the mortgage money. However, the property ownership papers remain in possession of the borrower and not the bank.

See also: What Is Usufructuary Mortgage?

English mortgage

In an English mortgage, 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 premises under the provisions of an English mortgage.

See also: What is English mortgage?

Mortgage by conditional sale

In case of mortgage by conditional sale, a property owner sells his property to a bank to secure cash, but has the right to recover his property once he repays the loan amount on a pre-set date. This means that the sale by the original property owner becomes “absolute” only if the original property owner is not able to repay his debt on the set date.

According to the transfer of property act, “no such transaction shall be deemed to be a mortgage, unless the condition is embodied in the document, which effects or purports to effect the sale”. This means the contract has to be in a written form and must be registered.

Also read all about the applicability of SARFAESI Act on home loan default

Mortgage by title deed deposit of equitable mortgage

In a mortgage by deposit of title-deeds arrangement, the borrower delivers to a bank documents of title to immovable property, with intent to create a security. In this case, registration of the instrument is not required as in other forms of mortgage. This form of mortgaging is also known as 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 notary.

See also: What Are Registered And Equitable Mortgages?

Anomalous mortgage

An anomalous mortgage is a flexible type that doesn’t fit into the standard categories like simple or usufructuary mortgages. Instead, it’s a customised arrangement designed to meet specific needs of both the borrower and the lender. For example, it might be used when a borrower needs unique repayment terms or the lender wants extra security measures based on the property’s location or value. This type of mortgage is often chosen in complex financial situations where traditional options don’t work. While it offers flexibility, it’s crucial to have clear terms and proper legal documentation to avoid misunderstandings later. Anomalous mortgages are all about tailoring the agreement to fit the situation, making them a practical choice in non-standard scenarios.

See also: All about reverse mortgage loans

Home loan and mortgage loan distinction

Home loans and mortgage loans are often used interchangeably, but they serve different purposes and involve distinct processes, eligibility criteria, and usage scenarios.

Purpose and usage:

• Home loan: A home loan is specifically taken to purchase, construct, or renovate a residential property. The loan amount is disbursed in stages or as a lump sum based on the agreement between the borrower and lender.
• Mortgage loan: A mortgage loan, on the other hand, is a broader term. It involves borrowing money by pledging immovable property (such as residential or commercial real estate) as collateral. Mortgage loans can be used for varied purposes like education, business expansion, medical emergencies, or debt consolidation.

Eligibility criteria:

• Home loan:
  • Eligibility depends on the property value, the borrower’s income, credit score, age, and repayment capacity.
  • Lenders usually fund up to 75%-90% of the property’s market value, depending on the type of property and the borrower’s financial profile.
• Mortgage loan:
  • Requires the property to be free of legal disputes or encumbrances.
  • Eligibility is determined based on the property’s market value, the borrower’s financial stability, and the intended use of funds.

Processing requirements:

• Home loan:
  • Requires detailed documentation about the property, such as the purchase agreement, title deed, and builder’s approvals.
  • Approval is quicker if the property is part of a builder’s pre-approved project by the bank.
• Mortgage loan:
  • Requires a valuation of the pledged property by the bank or financial institution.
  • Additional legal scrutiny is performed to ensure the property’s authenticity and marketability.

Loan tenure and interest rates:

• Home loan:
  • Typically comes with longer repayment tenures (up to 30 years) and slightly lower interest rates, as the loan is specifically for a housing purpose.
  • Both fixed and floating interest rate options are available.
• Mortgage loan:
  • Generally has shorter repayment tenures (up to 15-20 years) and higher interest rates due to the flexibility in the usage of funds.

Key difference:

While a home loan is a subset of mortgage loans, not all mortgage loans are home loans. Home loans are secured loans taken specifically for residential property, whereas mortgage loans allow leveraging the value of immovable property for a broader range of financial needs.

When to opt for a mortgage loan vs. a home loan

1. Choose a home loan 
   • If you are purchasing, constructing, or renovating a residential property.
   • When you want to avail of lower interest rates and tax benefits under Sections 24(b) and 80C of the Income Tax Act. 
2. Choose a mortgage loan 
   • If you need funds for non-housing purposes, such as education, business expansion, medical emergencies, or debt consolidation. 
   • When you have an existing immovable property (residential or commercial) to pledge as collateral.

Check out our detailed guide – Are Home Loan and Mortgage Loan Different? 

How does a mortgage work?

A mortgage involves borrowing money by pledging immovable property as collateral. Here’s how it works in detail:

1. Loan amount and approval 
   • The loan amount depends on the property’s market value, typically up to 60%-90% of the property’s worth, depending on the lender’s policies.
   • The borrower’s income, credit score, and repayment capacity are assessed during the approval process. 
2. Repayment schedule 
   • Repayment is done through Equated Monthly Installments (EMIs) over a fixed tenure, usually ranging from 10 to 30 years.
   • Each EMI includes two components:
     • Principal: The amount borrowed.
     • Interest: The cost of borrowing, calculated on the outstanding principal.
   • Over time, the interest component decreases while the principal repayment increases (amortization schedule). 
3. Interest rates
   • Fixed rate: Remains constant throughout the tenure, offering stability.
   • Floating rate: Varies based on market rates, such as the RBI’s repo rate, which can make EMIs higher or lower during the loan period. 
4. Prepayment and part-payment options
   • Borrowers can prepay the loan partially or in full before the tenure ends, subject to lender terms.
   • Prepayments reduce the outstanding principal, lowering subsequent EMIs or shortening the tenure. 
5. Default and foreclosure scenarios
   • If the borrower fails to make timely payments, the lender can declare the loan as default.
   • In case of willful default, the lender has the legal right to foreclose the property—selling it to recover the outstanding loan amount.
   • Borrowers are typically given notices and time to rectify the defaults before foreclosure. 
6. End of loan tenure
   • Once the borrower completes all EMIs, the lender releases the property documents and lifts any legal charge on the asset, making the borrower the full owner of the property.

Average mortgage rates in 2024

As of November 2024, mortgage interest rates in India range from approximately 8.35% to 14.50% per annum, depending on the lender and the borrower’s credit profile.

The Reserve Bank of India (RBI) has maintained the repo rate at 6.5% since February 2023, influencing lending rates across financial institutions. Loan tenures typically extend up to 30 years, offering flexibility in repayment schedules. The maximum loan amount available varies by lender and is influenced by factors such as the property’s value, the borrower’s income, and creditworthiness. Prospective borrowers are advised to consult with individual banks or housing finance companies to determine specific eligibility and loan limits.

Mortgage loan – regulatory updates

In 2024, the Reserve Bank of India (RBI) implemented several policy updates affecting mortgage terms, interest rates, and consumer protection:

1. Repo Rate Stability: Throughout 2024, the RBI maintained the repo rate at 6.5%, marking the tenth consecutive policy meeting without a change. This decision reflects the central bank’s focus on controlling inflation while supporting economic growth.
2. Enhanced Consumer Protection Measures: The RBI introduced guidelines to strengthen consumer protection in the mortgage sector. These measures include increased transparency in loan agreements, standardized disclosure of terms and conditions, and stricter regulations on loan recovery practices to safeguard borrowers’ interests.
   
   
3. Regulation of Non-Banking Financial Companies (NBFCs): In October 2024, the RBI barred four NBFCs from issuing new loans due to non-compliance with regulatory norms, including excessive pricing and inadequate assessment of borrowers’ repayment capabilities. This action underscores the RBI’s commitment to maintaining ethical lending practices and protecting consumers from predatory lending.
    

These regulatory updates aim to promote a stable and transparent mortgage market in India, ensuring that borrowers are well-informed and protected in their financial dealings.

Understanding tax benefits

Tax benefits play a significant role in reducing the overall financial burden of a home loan, making it an attractive option for borrowers. Under Section 24(b) of the Income Tax Act, borrowers can claim a deduction of up to ₹2 lakhs annually on the interest paid towards a home loan for a self-occupied property. If the property is rented out, there is no upper limit on the deduction for interest payments, but the total loss that can be set off under the head “Income from House Property” is capped at ₹2 lakhs per year.

Additionally, under Section 80C, borrowers can claim a deduction of up to ₹1.5 lakhs annually on the principal repayment of the home loan. This benefit applies to the total eligible deductions under Section 80C, which includes other investments such as EPF, PPF, and ELSS. It is important to note that these tax benefits are available only if the property is fully constructed and the loan is used specifically for the purchase, construction, or renovation of a residential property.

For first-time homebuyers, further incentives are provided under Section 80EE or Section 80EEA, offering additional deductions on interest payments beyond the limits of Section 24(b). These provisions aim to encourage homeownership and make housing loans more affordable for eligible taxpayers. Understanding and utilizing these tax benefits can significantly enhance the affordability of home loans, reducing the effective cost of borrowing.

How to compare mortgages?

By comparing interest rates and processing charges, borrowers will be able to get themselves a more financial prudent mortgage deal. When comparing mortgages, don’t go only by interest rates; also factor in the bank’s credibility. Also factor in the processing fee to arrive at the overall pricing.

7 things to look for in a mortgage loan

1. Go with a lender with an impeccable track record.
2. Maintain a good credit score.
3. Calculate your mortgage loan eligibility.
4. Choose the most suited type.
5. Also decide on the repayment tenure based on your monthly income potential.
6. Don’t borrow too much just because your can.
7. Go for a fixed rate if rates are on the lower side. Otherwise, floating rate of interest works better.

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