What Is Mortgage Loan?

Introduction

Buying a property often involves a large financial outlay, and paying the full amount upfront or having the entire amount at your disposable is not always practical. A mortgage loan provides a solution by allowing you to fund the purchase while repaying the amount in instalments over time.

Since mortgage products can appear complex, understanding how they work is important before making a decision. This guide explains what a mortgage loan is, the types available, and the key requirements to help you plan your property financing.

Get clear insights, whether you are purchasing your first property or exploring loan against property options.

What Is a Mortgage Loan?

A mortgage loan is a secured loan where you pledge an immovable asset such as residential or commercial property as collateral to obtain funds from a lender.

This security allows lenders to offer longer repayment tenures, typically ranging from 10 to 30 years.

The fundamental principle remains straightforward: you retain property usage and ownership rights while making monthly payments. However, if you default on repayments, the lender has legal authority to sell the mortgaged property to recover outstanding dues.

This arrangement benefits both parties: you access significant funds without selling your asset, while lenders mitigate risk through property security.

How Does a Mortgage Loan Work?

A mortgage loan operates through a structured process designed to protect both the borrower and the lender’s interests. Here's how the mechanism functions:

• Application and Approval Process: You apply with required documentation, including property papers, income proof, and identity verification. The lender evaluates your creditworthiness, property value, and repayment capacity before approval.
• Loan Disbursement: Upon approval, the lender disburses funds directly to your account or the property seller. Simultaneously, they create a mortgage deed establishing a legal claim over the property.
• Monthly Repayment Structure: Your monthly EMI (Equated Monthly Instalment) comprises two components:

1. Principal amount: The original loan amount being repaid
2. Interest charges: Cost of borrowing, calculated on the outstanding balance

• Property Rights During Loan Tenure: You continue using and maintaining the property while making regular payments. The lender cannot interfere with normal property usage, but major alterations may require their consent.
• Loan Closure: Once you complete all payments, the lender releases the mortgage deed, returning full property rights to you.

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What Are the Different Types of Mortgage Loans in India?

Understanding mortgage loan types helps you choose the most suitable option for your specific needs:

Based on Interest Rate Structure:

• Fixed-Rate Mortgages: Interest rates remain constant throughout the loan tenure, providing predictable monthly payments. This option suits borrowers preferring budget certainty, especially during volatile economic periods.
• Floating-Rate Mortgages: Interest rates fluctuate based on market conditions and changes in the RBI policy. These loans often start with lower rates but can increase or decrease over time, affecting your EMI amounts.

Based on Purpose and Property Type:

• Home Loans: Specifically designed for purchasing, constructing, or renovating residential property. These typically offer lower interest rates and longer repayment periods, with loan amounts up to 90% of property value.
• Loan Against Property (LAP): Uses your existing property as collateral to raise funds for any legitimate purpose: business expansion, education, medical expenses, or debt consolidation. Interest rates are typically 2-3% higher than home loans.
• Commercial Mortgage Loans: For purchasing or refinancing commercial properties like offices, shops, or warehouses. These loans have different eligibility criteria and documentation requirements compared to residential mortgages.

Specialised Mortgage Types:

• Reverse Mortgage: Designed for senior citizens (aged 60+), allowing them to receive a regular income by mortgaging their property while continuing to live in it.

Each mortgage type serves distinct financial objectives, so understanding your specific requirements helps determine the most appropriate option.

Who Is Eligible for a Mortgage Loan?

Mortgage loan eligibility depends on several key factors that lenders evaluate:

Age Criteria:

• Minimum age: 21 years at the time of loan application
• Maximum age: 65 years at loan maturity for salaried individuals, up to 70 years for self-employed borrowers
• Co-applicants can help extend effective loan tenure

Income and Employment Requirements:

• Minimum monthly income: ₹25,000 for salaried individuals, ₹2 lakh annual profit for self-employed
• Employment stability: At least 2 years in current employment for salaried, 3 years in current business for self-employed
• Regular, verifiable income source with supporting documentation

Credit Profile:

• CIBIL score: Minimum 650, though scores above 750 qualify for better interest rates and terms
• Clean credit history with minimal defaults or irregular payments
• Existing loan obligations should maintain a healthy debt-to-income ratio, ideally below 50%

Property Requirements:

• Clear, marketable title with proper documentation
• Property should be within lender's approved locations
• Age of property typically shouldn't exceed 30-40 years for construction loans

What Documents Do You Need for a Mortgage Loan?

Proper documentation expedites your mortgage application process. Here's what you'll need:

Identity and Address Verification:

• PAN card, Aadhaar card, passport, or driving licence
• Recent utility bills, bank statements, or rental agreements for address proof
• Recent passport-sized photographs

Income Documentation:

• For salaried: Last 3 months' salary slips, past 2 years' Form 16, bank statements
• For self-employed: Last 2-3 years' ITR, profit & loss statements, business registration certificates

Property-Related Documents:

• Sale deed, title documents, property tax receipts
• Approved building plans, completion certificate
• Property valuation report from approved agencies

Additional Requirements:

• Bank statements for the last 6 months showing salary/business income
• Existing loan statements, if applicable
• Insurance documents, if property is already insured

Most lenders now accept digital document submission, making the process more convenient. Ensure all documents are current and properly attested to avoid processing delays.

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What Are the Benefits of Taking a Mortgage Loan?

Mortgage loans offer compelling advantages for property-related financing:

• Financial Flexibility: Access substantial loan amounts typically up to ₹10 crore or more, depending on property value and your repayment capacity. This enables property purchases that would otherwise require years of saving.
• Competitive Interest Rates: Secured nature of mortgage loans means lower interest rates compared to personal loans or credit cards, typically ranging from 8.5% to 12% per annum.
• Extended Repayment Tenure: Repayment periods of up to 30 years keep monthly EMIs manageable, allowing you to maintain a comfortable cash flow while building property assets.
• Tax Benefits: Significant tax advantages under the Income Tax Act:

• Deduction up to ₹2 lakh on interest payments under Section 24(b)
• Principal repayment deduction up to ₹1.5 lakh under Section 80C
• Additional ₹50,000 deduction for first-time homebuyers under Section 80EE

• Asset Building: Unlike rent payments, mortgage EMIs build equity in valuable real estate, creating long-term wealth and financial security for your family.

Conclusion

A mortgage loan serves as a practical financing solution for property ownership and various financial needs.

When choosing between mortgage loan types such as fixed or floating rates, home loans, or loans against property, it’s important to consider your specific requirements to make an informed decision. Eligibility depends on age, income stability, credit score, and proper documentation.

Mortgage loan offers lower interest rates, tax advantages, and asset building opportunities through manageable monthly payments.

For personalised mortgage solutions and expert guidance on choosing the right loan type for your needs, connect with Kotak's mortgage specialists who can help streamline your application process.