Home loan borrowers while searching for loans come across a term most often — ‘mortgage loan’. It is a type of loan that is very different from home loan. Though both are secured loans, they are different in their features, even in terms of interest rate offerings. Here is the difference between the two types of loans:
What Is Mortgage?
Mortgage is the process of offering something as a guarantee or collateral against a loan. It is an agreement based on which a bank, building society or a lending institution lends money at interest, in exchange for holding title of the debtor’s property. There are various types of mortgages — simple mortgage, usufructuary mortgage, English mortgage, sub mortgage.
What Is A Mortgage Loan?
Mortgage loans, which are also commonly known as loans against property, are loans that are taken in lieu of property kept as collateral. “These can be used to either buy or build a house or refinance a property. Refinancing refers to getting a new loan for a property while the original loan is still being repaid. It is usually done to get a loan with better terms,” according to IDFC First Bank’s website.
In mortgage loans, the property stays as a guarantee or collateral until the loan is fully repaid.
What Are Home Loans?
Home loans are paid by lenders in advance to the borrowers to buy a house or flat. “A Home Loan is a secured loan and the property purchased by the borrower is held as collateral by the Bank or the lending institution through the tenure of the loan. The features of the Home Loan are created such that the payment of the borrower (in the form of an EMI or a part of the capital amount) can be extended over a long time, sometimes as long as 20 to 25 years,” according to Kotak Mahindra Bank’s website.
Mortgage Loans Vs Home Loans: The Difference
- Purpose: The final purpose of a mortgage loan amount is not constrained, unlike the single objective of home loan which is only for the contruction or buying a house. Mortgage loan can be used for any purpose, including personal and business.
- Interest Rates: Mortgage loans are general costlier by 1-3 percentage points as compared with home loans.
- Loan Amount: Mortgage loans can be availed up to 60-70 per cent of the property’s market value, while home loan can be availed by up to 90 per cent of the property’s market value.
- Processing Fees: In mortgage loans, processing fees are generally charged in the range of 0.8-1.2 per cent. However, in home loans, the fees is around 1.5 per cent of the loan amount.
- Repayment Tenure: Mortgage loan offers a longer duration when compared to home loans. The repayment tenure of a mortgage loan can be up to 30 years, while home loans generally come with a repayment tenure of up to 15 years. However, the tenure also depends upon the age of the borrower. The younger, the longer tenure.
Types Of Mortgages?
There are various types of mortgages — simple mortgage, usufructuary mortgage, English mortgage, sub mortgage. In simple mortgage, the lender can sell the property and recover its amount if the borrower fails to repay the loan in full. In usufructuary mortgage, full sownership is not transferred to the lender, instead a temporary right is given through with the lender can earn profit from the property to recover the loan amount.
In the English mortgage, the collateral can come under the possession of the lender if the borrower fails to make full repayment of the loan during the tenure originally agreed upon.
In sub mortgage, “If a prospective borrower has a less than ideal credit history or a low credit score and the lender would like to offer a loan, they tend to do so at higher interest rates. It is done to ensure recovery of their money in case the borrower failed to make payments. These are termed as sub mortgage loans,” according to IDFC First Bank.
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