When it comes to personal financing, individuals often seek high-value funds that come with low to no restrictions to end-use. Such advances are usually desired for big-ticket expenditure needs like child’s marriage, residential property purchase, overseas travel, higher education, business investment, and the likes. Personal advances seldom make up for such funding needs, purporting one to look out for other funding alternatives.
A mortgage loan is one such alternative that has gained prominence lately when it comes to personal financing. Be it home based spending or business expansion needs, a mortgage-based advance comes to the rescue of many. Along with high funding value, it comes with several other unique perks that make it a suitable financing alternative for many. Let’s take a detailed look at everything related to this funding option to better understand its role and benefits.
Mortgage Loan Meaning and Its Working
To understand what a mortgage advance means, it is first necessary to understand the meaning of mortgage. It is a security provided in the nature of a fixed, unmovable asset to raise financing. A mortgage loan is thus a secured advance that is provided against the current market value of the fixed asset provided as collateral. The financing quantum is based on several factors along with the market value of the asset, with LTV or Loan to Value ratio playing a crucial role.
Other important factors that affect the total financing value include the location of the property selected as security, the amenities available in and around it, its resale value, the borrower’s income and repayment capacity, and the likes.
Based on these factors and the borrower’s eligibility for the advance, the lender determines the maximum funding value to lend to the individual against a set rate of interest. Once the loan is approved, it is sanctioned with the borrower’s agreement and disbursed to his/her account. Once disbursed, the borrower can start repaying the advance as per the EMI determined by the lender.
Such EMI will be payable until the end of the tenure determined during the loan sanctioning. As a mortgage loan is often a long-term advance, the responsibility for regular EMI payment is created for a tenure of up to 15 to 20 years. One the loan is repaid in full, including the principal, interest, and any other charges levied, the lender releases the property from such mortgage, returning its complete ownership and right to the borrower with and NOC issue.
In case the borrower is unable to repay the loan completely or in part, such asset mortgaged is auctioned to cover for the financing provided and interest thereof.
LTV in Mortgage Advances
LTV or Loan to Value Ratio is a measure of the maximum financing value a lender can provide to a borrower as a percentage of the current market value of the collateralised asset. The LTV indicated by the lender is thus the cap to maximum financing available with a lender, which varies with the borrower profile and asset collateralised.
In fact, LTV is a common concept for all types of secured loans. Under mortgage financing, two popular types of loans provided are home loans and loans against property. In the case of home loans, the LTV determines the down payment you need to make for the house purchase while the remaining amount is financed by the lender, and can go up to 90% of the property’s current market value. For a loan against property, LTV is just the financing cap indicated by the lending institution and nears 70-80%.
LTV is determined based on different risk factors associated with the borrower, and the total financing value can be either the total LTV or a part of it as per one’s eligibility for the mortgage loan.
Types of Properties Accepted for Mortgage Financing
As already mentioned, not all assets qualify as mortgages for the purpose of raising finance. Thus, the specific assets that usually qualify when it comes to mortgage financing include the following.
Any commercial property whether self-occupied or let-out by the borrower qualifies as a collateral for mortgage financing.
Self-occupied residential property
Individuals owning a residential property that is self-occupied can avail a loan against property or a home loan against its mortgage.
Let-out residential property
Similarly, you can also utilise a rented out residential property for raising mortgage financing.
- Business plant and machinery
If you own a business with plant and machinery of considerable value, it can serve as collateral for mortgage funding. Note that any machinery included should be a fixed asset for the purpose.
Any land, commercial or non-commercial, except an agricultural land is eligible as a mortgage for raising funds.
Once you have decided on the asset to utilise for availing a mortgage loan, you can proceed to check your eligibility for the advance. If eligible, arrange the necessary documents and apply for a suitable loan amount with your selected lender. You can go for an online application to experience hassle-free processing with minimal paperwork.