Types of Mortgage: A Guide for Homebuyers in India

Types of Mortgage are important to understand when purchasing a house in India. There are a lot of other types of mortgages available to cater to different financial situations and preferences. Knowing about these options can help people make smart decisions while buying homes that fit their needs. From Simple mortgages to government backed mortgages, each type has its own benefits and things to think about. 

From exploring multiple properties to choosing the right location, the home buying process is an exciting journey. However, finding the right source of funding can be overwhelming. But don’t worry. Once you have decided on a budget and have understood how the mortgage system works, it won’t be difficult for you to finance your home. In this blog, we have listed down the different types of mortgage which you can apply for.

Reserve Bank Of India defines mortgage as, “the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan and existing or future debt or the performance of an engagement which may rise to a peculiarly liability.”

What is a Mortgage?

A debt instrument that is backed by collateral for an immovable asset is called a mortgage. Simply put, it is a legal agreement between a borrower/debtor and a lender/creditor. The lender gets the right to seize or sell a borrower’s property if the loan amount is not paid. Through mortgage, you can purchase a home without paying the whole price upfront.

Additionally, in 2024, home buyers should be aware of recent changes in interest influenced by a recent pause of rate hikes at 6.50% by The Reserve Bank of India (RBI), This has led to a change in interest rates of new home loans provided to salaried and self-employed customers.

What are the Types of Mortgage in India?

The concept of a mortgage is enumerated in the Transfer of Property Act (1882), which is one of the most important real estate laws in India. As per the act, there are six major types of mortgage in India:

• Simple Mortgage
• English Mortgage
• Usufructuary Mortgage
• Mortgage by Conditional Sale
• Anomalous Mortgage
• Mortgage by the Sale of Title Deed

Simple Mortgage

When a borrower mortgages his property to avail a loan, it is called a simple mortgage system. Here, the mortgagee/lender has the right to sell the property to extract the loan amount if the payment is not made on time. It is one of the most convenient types of mortgage.

A simple mortgage is not only uncomplicated but also an advantageous choice for borrowers and lenders seeking to establish a loan secured by real property. Understanding the risks as well as the benefits of this particular type of mortgage allows both parties, not only to make informed decisions. 

English Mortgage

In this type of mortgage, the borrower assures the lender to pay the loan amount on a set date and transfers the ownership of the property to the mortgagee. However, this transfer is done subject to a proviso that the ownership rights will be reinstated to the borrower upon the complete payment of the mortgage. If the borrower fails to pay the loan amount, the lender will retain the property rights without any obligation of re-transferring the asset. 

Mortgage by Conditional Sale

Mortgage by conditional sale is one of the popular types of mortgage. In this, a condition is put when an agreement is reached between the borrower and lender. The mortgaged property is sold to the lender on the condition that-

• If the mortgagor defaults the payment, the sale becomes absolute.
• If the loan amount is paid, the sale becomes null and void. 

Usufructuary Mortgage

Usufructuary Mortgage one of the unique types of mortgage because no personal liability gets incurred on the borrower. To put it simply, the borrower gives the possession and the subsequent right of earning profits from the property to the lender till the repayment of the loan. So, in lieu of the principal amount/interest, the lender can earn rents or profits on the property held under his possession. The title deed, however, remains with the mortgagor. 

The Usufructuary Mortgage is a unique combination of security and flexibility that makes it an appealing choice for both borrowers and lenders involved in property financing complexities.

Mortgage by Sale of Title Deed

Also referred to as an Equitable mortgage, the buyer has to submit the title deed of the immovable asset in order to avail of a loan. Unlike other types of mortgages, the primary objective of an equitable mortgage is to create security for the lender in case the borrower fails to repay the loan.

What is important to note is that an equitable mortgage is very different from a simple mortgage or a bank loan. Here, the property’s possession is not transferred to the lender in this case. The borrower can also not accrue any rents/profits on security. Enlisted are the conditions that must be met to prove a mortgage by deposit of title deed:

• There must be a debt;
• Delivery is made with an aim of creating security;
• The delivery must be made in the towns which are mentioned in the act;
• Delivery must be made by a borrower or the agent concerned to the lender/lender’s agent

Anomalous Mortgage

As the name suggests, a type of mortgage which does not fall under any of the above-listed categories is called an anomalous mortgage. It is defined in the section 58 of the Transfer of Property Act, 1882. 

Commercial Mortgage

Commercial mortgage is a loan designed specifically for non-residential properties like offices, shops or factories instead of homes. These loans require larger upfront payments (25% – 50%) with shorter repayment periods ranging from five to twenty-five years and typically higher interest rates than residential mortgages. Lenders evaluate potential income generated by the property rather than borrower’s credit history, often including extra costs or stricter conditions during approval process compared to home loans. Owning a business space through commercial mortgage can increase its value over time with updates while providing control in daily operations but involves higher risks due to reliance on consistent profits that ensure timely loan payments without difficulty amid potential downturns or financial setbacks; careful consideration of specific property requirements, funding options and strategic goals is essential before choosing this financing option.

Equitable Mortgage

Equitable mortgage is an arrangement for a mortgage where the borrower gives their beneficial interest (the right to own and use) in property as security, but not transferring legal title to the lender. In this kind of setup, the person who borrows maintains ownership over the property while one who lends keeps hold of title deeds for protecting his/her loan. A registered mortgage must be officially registered with authorities, unlike an equitable mortgage. The agreement of the loan is only between the person who borrows and the one who lends. This method brings more freedom and speed to this process, yet it also increases risk for lenders because there is no public record about arrangement. The enforceability of an equitable mortgage depends on how a court interprets what was intended in making that transaction.

Other Types of Mortgages to Consider

Although only 6 types of mortgages have been defined in the Transfer of Property Act, 1882, here are some other mortgages which you can consider.

Reverse Mortgage

With an aim to provide financial security to senior citizens, the government introduced the reverse mortgage scheme in 2008. Unlike other types of mortgage, the lender pays monthly installments to the borrower, and the loan is later repaid in full amount. Initially, the scheme was valid for a period of 20 years. However, in 2013, the Reverse Mortgage Act was amended and the scheme was extended to the life of the borrower by pledging residential assets. The borrower can use the money only for specific purposes like medical emergencies and not for trade or business. 

Balloon Mortgage

Balloon mortgages are short-term loans that are easy to qualify for and have low-interest rates. Initially, the monthly payments under this financial scheme are on the lower side; however, at the end of the loan term, the borrower has to pay the entire debt at once. Simply put, the loans are not “fully-amortized” over the loan term. Although the borrowers are offered a future refinancing option under this scheme, the market rates are used for refinancing and not the original rates. 

Registered Mortgage

Under the “registered mortgage” scheme, a borrower transfers the property rights to the lender if the loan amount is not repaid. The lender then retains the property rights and has the right to do what it deems fit. Although the conditions of a registered mortgage mirror the conditions of an equitable mortgage, there are a few differences between the two types of mortgage. 

Criteria	Registered Mortgage	Equitable Mortgage
Approval	Sub-registrar’s approval is required.	Agreement decided amicable between the borrower and lender.
Loan Recovery	If the loan amount is not repaid, property rights are transferred to the lender and the lender can do whatever deems fit.	The property rights are transferred to the lender and the property is auctioned off.
Risk Associated	Less risky	More risky
Stamp Duty Cost	High. Can be 5% of the loan amount	Low. 0.1-0.2%
Affordability	Expensive	Affordable

With the information provided above, you must now be aware of the different types of mortgage systems. But before proceeding with any system, carefully gauge your financial situation and do thorough research. Make sure to compare the interest rates and eligibility criteria of different banks so that you strike the right deal.

Government Backed loans 

There exists various mortgage programas that are supported by the government, with the primary objective of encouraging and facilitating ownership of home. Programs such as the National Housing Bank (NHB) or Pradhan Mantri Awas Yojana (PMAY), are designed to offer favourable conditions and reduced interest rates to individuals who meet the eligibility criteria.

The Pradhan Mantri Awas Yojana (PMAY) aims to aid individuals in purchasing homes by providing financial support, targeting those from deprived backgrounds such as the economically weaker sections (EWS), low-income groups (LIG), and middle-income groups (MIG). Through offering reduced interest rates and assistance with down payments, these initiatives strive to make the dream of owning a home a reality for eligible individuals at a more affordable cost.

Loan Against Property (LAP):

Loan Against Property is  another  financial instrument offered by Indian banks for purposes other than purchasing real estate ,  it  differs  from other types of mortgage in India,such a way that unlike other types of mortgage in India  that are typically used to purchase real estate.

FAQ

Q1. What is a Mortgage by Conditional Sale?

A Conditional Mortgage Sale, which is a category of mortgage loan by which the lending institution establishes terms when it makes a loan agreement with the borrower. The encumbered real property is sold to the lender, on the condition that it surrenders its ownership in case the mortgagor fails to pay the dues back, either in installments or in full. If the loan amount is paid, not only the sale contract will be revoked but also the cognizance property will transfer back to the mortgagor.

Q2. What is a Mortgage by Sale of Title Deed?

An Equitable Mortgage, also known as “Mortgage by Sale of Title Deeds,” involves providing title deeds for a property in exchange for loan funds. In this scenario, the individual seeking financing must surrender their property’s ownership documents to secure funding. The primary objective differs from other types since it provides protection for lenders if the borrower fails paying back what was owed.

Q3.  What is the significance of  Conveyance Deed?

The Conveyance Deed is a legal document of an immovable property that transfers title of property from one person to another. To the mortgages, the vital role of it consists in personalization of the rights and duties of the parties in the contract.

Q4. What are the recent changes in interest rates for home loans in India?

In 2024, Home buyers should keep in mind the recent changes in the interest rates which are attributed to the RBI’s recent pause of rate hikes at 6.50%, while still retaining the interest rates which played a role in driving them up. That resulted in a change of interest that salary and self-employed customers received on new home loans.