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Demystifying Mortgages: What Is a Mortgage and How Does It Work?

December 12, 2023 • 749 views

Different types of credit, like loans, serve as vital financial lifelines that empower individuals to achieve their goals, from starting a business to securing their dream home. Among the different types of loans made available, one approach that has revolutionised the lending landscape is the use of property as collateral, i.e., mortgage. 

Did you know that unlocking your property’s value under a mortgage can provide an excellent opportunity for you to access the funds you need? But what is a mortgage, and how does it work? Let's break it down.

What is a Mortgage?

A mortgage is a contract where a bank, building society, or financial institution lends money to individuals against an immovable asset (real estate or land), which is considered collateral. In return, the lender secures an interest on the property and holds the title until the debt is settled. The transfer of title becomes void once the debt is fully paid and the borrower retains ownership of the property.

Also Read: Different Types of Mortgage Loans in India

Types of Mortgages

The different types of mortgages are listed below:

  • Simple Mortgage: Under this, the borrower retains the right to use and enjoy the property, but the lender has the right to take possession of the property if the borrower fails to repay the loan.
  • Usufructuary Mortgage: The borrower transfers the possession of the property to the lender. The lender can utilise the benefits of the property like rent or profit, until the loan is repaid.
  • Commercial Mortgage: This is a type of mortgage that is taken by a business or commercial entity for buying, constructing, or improving a commercial property.
  • English Mortgage: The borrower transfers property ownership to the lender as security for the loan and retains the right to get the property back once the loan is repaid.
  • Anomalous Mortgage: An anomalous mortgage is a type of mortgage that does not fit the definition of any other type of mortgage. It is a hybrid of different types of mortgages and is created to suit the specific needs of the borrower and lender.
  • Mortgage by Title Deed Deposit: In this, the borrower deposits the title deed of the property with the lender as security for the loan and retains the right to use and enjoy the property. However, the lender has the right to take possession of the property if the borrower fails to repay the loan.
  • Mortgage by Conditional Sale: In a mortgage by conditional sale, the borrower sells the property to the lender, but the sale is conditional upon the repayment of the loan.

How Does a Mortgage Work?

Here's the basic process of how a mortgage works:

  • Down Payment: When you buy a home, you typically make a down payment, which is usually a percentage of the home's purchase price. The larger your down payment, the less you'll need to borrow.
  • Loan Approval: You apply for a mortgage with your chosen lender. They'll review your financial information, including your credit score, income, and debts. If you meet their criteria, they'll approve your loan.
  • Interest Rate: You'll be offered an interest rate on your loan amount, which will determine the EMI amount.
  • Monthly Payments: Your mortgage is typically paid in monthly instalments. Each payment covers a portion of the loan amount (the principal) and the interest on the loan.
  • Repayment Period: Mortgages usually have a fixed term, commonly 15, 20, or 30 years.
  • Ownership: While you're paying off your mortgage, its ownership will remain with you, unless specified otherwise. Once the loan is repaid, you own the property outright.

The Mortgage Application Process

Getting a Mortgage Loan from Poonawalla Fincorp is a straightforward process. Just follow these steps:

  • Step 1 - Start Your Application: When applying online, select the loan option and click on ‘Apply Now’.
  • Step 2 - Provide Your Details: Provide your personal and financial details in the application form.
  • Step 3 - Submit Your Information: After completing the form, submit the details for assessment and verification.

The lender will assess and verify your loan application to ensure it meets the necessary criteria. You'll receive confirmation regarding the approval of your loan application. Once approved, you can authorize the disbursement of the loan.

Interest, Principal, and Amortization

  • Interest: This is the cost of borrowing money for your mortgage. It can be a fixed rate or a variable rate based on the loan amount. Over time, your monthly payments reduce the interest amount and increase the principal amount.
  • Principal: The principal is the original loan amount. When you make mortgage payments, a portion goes toward reducing this amount.
  • Amortization: This is the process of gradually paying off the loan over time with regular, equal payments. In the early years, more of your payment covers interest, but as time passes, a higher portion is applied to the principal until the loan is fully paid off.

Also Read: Term Loans: Definitions, Classification, Benefits & Eligibility

Conclusion

In conclusion, a mortgage is a type of loan that allows individuals to access funds by using their immovable assets as collateral. There are different types of mortgages available, each suited to different needs and situations. Understanding the mortgage process and the different types of mortgages available can help individuals make informed decisions when it comes to their financial goals. By following the necessary steps in the mortgage application process, individuals can secure loans that meet their financial needs and repay them over time with regular payments.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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