In India, mortgage loans come in various forms. Most of us are familiar with the traditional home loan which is used to fund your purchase of apartments in India. However, there are a number of variations in mortgage loans itself. Here we look at the types of mortgage loans available to different classes of borrowers and also the process & implications of a mortgage loan in India.
1. Builder loans for retail and commercial property
This is not like the traditional home loan given to the buyer of the property. Here the bank or HFC directly funds the builder or real estate developer. The funding is done against the mortgage of titles and against the units ready for sale. These loans are extended to developers and builders for constructing commercial or residential complexes.
Future repayments are normally linked to the sale of units to the end customer. Such builder loans have a tenure ranging from 6 months to 5 years and the disbursement of the loan is based on the progress of construction.
2. Home loans for purchase of property
These are the most popular categories wherein individuals take loans from banks and HFCs to fund their purchase of apartments, tenements etc. Normally, the tenure of these loans extends from 10 years to 25 years and tends to be long-term in nature. Individuals generally take such loans to buy a property where they can move in with their families and live.
Here, it is not just the EMI and cost of funding that matters, but even the amenities of the property and the location of the property are key factors.
Home loans are eligible for tax deduction on interest up to Rs2 lakhs per financial year. In addition, the principal repayment portion is eligible for exemption under Section 80C of the Income Tax Act.
3. Loans for commercial property
These loans are not meant for purchasing a home to live in, but for purchase of commercial property. This is normally taken by businessmen and entrepreneurs looking to take a loan for purchasing office premises, warehousing premises, or factory premises. Like in other cases, the property being purchased is used as collateral for the loan.
The amount of the loan is based on the value of the property and the income statement and balance sheet of the borrower, which signifies the ability to repay the loan. Interest rates on purchase of commercial property is higher than the rate of loans for residential property. Most of the other terms and conditions of the loan would broadly remain the same.
4. Loan Against Property (LAP)
The loan against property (LAP) is also sometimes called Property Mortgage Loan. Unlike the home loan or commercial where the property is purchased with a loan, here the person or the business is already the rightful owner of the property; either in full or on proportionate basis. The property already owned by a person is pledged as security for the loan and it is offered as collateral.
This type of loan against property (LAP) is offered for commercial, residential, and rental properties. The interest rates for Loan Against Property are generally lower than unsecured loans, but higher than the traditional home loans.
In LAP, if the borrower defaults on the loan, then the bank/lender has first lien over the property.
5. Plot loan or construction loan
Instead of congested streets and cookie-cutter condos, in recent years, many people prefer buying a plot of land on the outskirts of urban areas and constructing independent houses on such plots. In such cases, the plot is bought in advance at a low cost. Such plot purchases can also be financed by loans which are called plot loans.
However, the bankers insist that such plot loans would only be allowed in case it is a plot for residential purposes and not for commercial purposes. The tenure of the plot loan is normally 10 years to 15 years and the purchase of the plot loan does not offer any tax breaks.
When the person undertakes the construction of a house on that land, then the typical benefits of Section 24 and Section 80C will be available. Plot loans have become quite popular in smaller cities and towns.
To sum it up, home loans differ from mortgage loans (LAP) in that a home loan can only be used to purchase the said property. On the other hand, the LAP has no restriction and you can use the funds for any purpose. The only condition is that the LAP amount cannot be used for any purpose that is illegal or speculative in nature.
That sums up the types of mortgage loans that are available to customers from banks and NBFCs. The mortgage loan in India or the LAP is becoming another popular means of filling funding gaps.