Mortgage Categories: Things You Should Know

Are you familiar with the concept of pledging gold in exchange for a loan? It's a common practice, and if you apply this strategy to a real estate purchase, it essentially becomes a mortgage loan. When buying property, securing a loan is often an essential step. A mortgage loan, in particular, provides significant financial support during the home-buying process.

However, with so many mortgage categories, it can be overwhelming to navigate the options. In this comprehensive guide, let’s break down the various mortgage categories so that you can make a more informed decision.

What Is a Mortgage?   

A mortgage is essentially an agreement between the borrower and the lender (often a bank) when taking out a loan to purchase a house or any real estate property. With a mortgage, the borrower consents to repay the loan within a set period, usually with a fixed interest rate, ensuring the lender is compensated for the loan provided. So, through the agreement, the borrower pledges the property as collateral, meaning if they fail to reimburse the loan, the lender can sell the property to recover the unpaid amount.

Different Types of Mortgage Categories

1: Simple Mortgage    

A simple mortgage serves as the foundation for other mortgage categories. In this, the borrower pledges the property as collateral, meaning the lender has the right to sell the property if the borrower becomes the defaulter. However, the borrower does not transfer the title of the property to the lender. Instead, the lender gains the right to sell the property under specific conditions outlined in the agreement.

2: Mortgage by Conditional Sale

Mortgage by conditional sale requires the borrower to transfer the property to the lender under specific terms. If the borrower defaults, the sale becomes absolute, and the lender acquires ownership of the property. However, if the borrower repays the loan, the sale is void, meaning the property remains with the borrower.

3: English Mortgage   

In an English mortgage, the borrower hands over the property ownership to the lender as collateral for the loan. A fixed repayment period is agreed upon, and the lender has the property until the loan is repaid. During this period, the borrower can either rent or occupy the property. If the borrower defaults, the lender can sell the property to recover the loan amount.

4: Usufructuary Mortgage

A usufructuary mortgage is unique because it benefits both the lender and the borrower. In this type of mortgage, the borrower retains the property ownership but grants the lender the right to use the property for profit, such as renting it out. The lender earns income from the property, and once the loan is repaid, the borrower recovers full possession of the property.

5: Anomalous Mortgage

An anomalous mortgage is distinct for its non-standard terms and arrangements. Unlike other mortgages, this type doesn't follow conventional rules and may include unusual collateral arrangements or repayment plans. Under the Transfer of Property Act in India, an anomalous mortgage is a distinctive type. It permits the borrower to sell the property to the lender and reclaim it after repaying the loan, subject to specific conditions.

6: Reverse Mortgage       

A reverse mortgage is primarily for senior citizens aged 62 or older. In this arrangement, the borrower retains property ownership but allows the lender to take possession. The borrower receives money from the lender through a round-off, monthly payments, or a line of credit. The loan does not need to be repaid during the borrower's lifetime. Upon the borrower's death, the lender sells the property to recover the loan amount.

7: Equitable Mortgage      

Among the mortgage categories, an equitable mortgage involves the borrower providing the title deeds of the property to the lender as collateral. The borrower has ownership of the property, and only the deeds are transferred. If the borrower fails to reimburse the loan, the lender has the right to sell the property through an auction to recover the owed amount.

Mortgage Categories Depending on Rates

1: Fixed-Rate Mortgage      

A fixed-rate mortgage is among the most popular mortgage categories due to its stability. The interest rate is constant throughout the loan term, regardless of market fluctuations. This predictability allows borrowers to budget effectively and easily track their monthly EMI payments, making it a reliable choice for those who prefer financial certainty.

2: Adjustable-Rate Mortgage (ARM)     

An adjustable-rate mortgage (ARM) is linked to market conditions, meaning the interest rate can rise or fall depending on the performance of the economy. While ARMs typically start with a fixed interest rate for an initial period, the rate adjusts periodically based on specific benchmarks or indices. Borrowers must be prepared for potential gains in their payments as market conditions change, which makes flexibility an important factor when considering an ARM. 

3: Variable–Rate Mortgage

A variable-rate mortgage is influenced by changes in the repo rate, which is set by the Reserve Bank of India (RBI). This type of mortgage can experience significant fluctuations based on the overall economic conditions and stock market performance. When the economy performs well, the interest rate tends to decrease, benefiting the borrower. However, the rate may rise during economic instability, leading to higher payments.

4: Interest-Only Loans

Among mortgage categories, interest-only loans offer borrowers the possibility to pay only the interest on the loan for a specified period. During this phase, the borrower does not reduce the principal loan amount. After this initial period ends, the loan converts to a standard mortgage, where both the principal and interest must be repaid. This can be a convenient option for those needing temporary financial relief or expecting to have more income later to handle full repayments.