If you’re planning to buy a house, it’s important to understand the different types of mortgage loans to determine your financial flexibility and long-term stability. There are several different types of mortgage loans depending on the use case, and choosing the right one can be the difference between financial struggle and worry-free homeownership.
This will help you make an informed decision and secure the right loan to purchase your dream property.
What is a mortgage?
A mortgage is a type of loan that lets you buy real estate, where the property itself serves as collateral. It offers a secure and cost-effective way of buying a home or commercial space without paying the full amount upfront. Instead, you can repay the loan in comfortable instalments over a fixed period, which typically ranges from 15 to 30 years.
Mortgages are typically issued by lenders and financial institutions with interest rates varying based on factors like loan type, interest rates, and the borrower’s creditworthiness. Since a mortgage is a long-term commitment, it’s important to select the right loan type and repayment plan to avoid any hassle later.
Mortgage Loan Types in India
Mortgage loans in India are segregated into seven categories based on the nature of the transaction and interest rate calculation. Here are all of them:
Types of mortgage loans: Based on interest rate
1. Fixed-rate mortgage loans
As the name suggests, fixed-rate mortgages come with a set interest rate, applicable throughout the tenure. Because the rate is fixed, borrowers can easily calculate their outlay as the size of the EMIs will be the same for the entire loan term.
Also, with fixed-rate mortgage loans, you don’t have to worry about market shifts and the consequent rise in interest rates. However, you also don’t benefit from the reduced interest rates from such shifts.
2. Variable-rate mortgage loans
Variable-rate (or floating-rate) mortgages have an interest rate that fluctuates over time. These fluctuations usually come from movement in the rate quoted by the bank, which is influenced by the repo rate controlled by the Reserve Bank of India (RBI). If the repo rate drops, so does the interest rate and vice-versa.
So, if you’re certain that the economy is going to progress, you can get a floating-rate mortgage, as the interest rates will always be on the lower side. But remember, there’s an equal probability of the economy plummeting and interest rates shooting up. It would be best if you made a decision keeping both possibilities in mind.
3. Adjustable-rate mortgage loans
Adjustable-rate mortgage (ARM) lies at the intersection of the twotypes of mortgage loans discussed above. For a certain initial period of the loan, you will have a fixed interest rate. It could be the first five, seven, or ten years.
After this period, the interest rate will change based on market dynamics and original loan terms. Also, this rate will keep changing, usually every six months. But that’s not concrete. ARMs come with a variety of adjustment intervals and lengths, and you can pick one according to your preferences.
The ARM rates change as per the index, which is a benchmark interest rate that reflects the market conditions. Lenders use this index, add their margin to it, and that’s the interest rate you have to pay. In case the index shoots up in response to a declining economy, your interest rate will significantly shoot up.
In some scenarios, these economic fluctuations can lead to a dangerous and unaffordable increase in interest rates. But the opposite is also possible.
Given the uncertainties associated with ARMs, they are best suited for people who are likely to move a lot, preferably before the initial fixed-rate period elapses.
So, these are some of the types of mortgage loans associated with interest rates. Choosing the right one will allow you to service your loans without financial headaches.
Types of mortgage loans: Based on the nature of the transaction
1. Simple Mortgage
In a simple mortgage loan, the lender reserves the right to sell the property if the borrower defaults. However, the ownership of the property isn’t transferred to the lender. Under such mortgage loans, the borrower has to sign an agreement granting the lender the right to sell.
2. Mortgage by Conditional Sale
Under this type of mortgage loan, the lender has the right to put up conditions regarding repayment that the borrower must meet. These conditions usually outline clauses related to the sale of a house in case of non-repayment or delays in payment. Also, these conditions may include interest rate penalties due to regular delays in repayments or non-repayment.
3. English Mortgage
Here, the borrower agrees to fully repay the mortgage loan on a certain date while transferring the ownership of the property to the lender. That said, the lender has to re-transfer the property to the borrower if the repayment is made in full by the specified date. In case of a default, the lender is allowed to sell the property and recover the debt through the proceeds.
4. Usufructuary Mortgage
Lenders usually have the upper hand in this type of mortgage loan. Here, the borrowers need to transfer the possession of the property, along with the usage rights, to the lender. However, the borrowers still retain the ownership of the property or land.
The lender also has the right to put up the property on rent or enjoy the income from the produce generated by the property until the loan repayment is complete.
5. Reverse mortgage
A reverse mortgage is a specialised home loan for senior citizens that lets them convert part of their home equity into cash without selling the property. Instead of making monthly payments, the homeowner receives funds from the lender through a lump sum, line of credit, or monthly disbursements. The loan is repaid only when the homeowner sells the property, permanently moves out, or passes away. While this can provide financial flexibility for seniors, it’s crucial to carefully evaluate the terms and conditions.
6. Equitable mortgage
An equitable mortgage is a type of mortgage where you can pledge the property as collateral by simply handing over the title documents to the lender. In case of a loan default, the lender has the equitable right to sell the property to recover the amount. This type of mortgage is suitable in situations where a formal mortgage deed cannot be executed.
Choosing the right type of mortgage loan, in terms of the nature of the transaction, will allow you to better manage your assets without giving up too much control.
Conclusion
Now that you’re aware of the various types of loans for mortgage available for homebuying, you can make an informed borrowing decision keeping your finances in mind. Remember that the eligibility criteria and approval process vary between lenders.
So, conduct thorough research, shop around, and compare the loan terms offered by different lenders to find the option that suits you the best.
Or, you could just opt for Tata Capital’s housing loan and cut short your purchase process. Apart from our attractive interest rates, we offer flexible repayment options, fast loan processing, and customer service that is always there to help.
All in all, we help you get to your dream home quickly without the associated financial worries.
FAQs
Many people cannot afford to buy a home outright. Securing a mortgage can help them spread the cost over several years, making homeownership more accessible and affordable.
A fixed-rate mortgage has a constant interest rate for the loan term. A variable-rate mortgage, on the other hand, fluctuates based on market interest rates, affecting monthly payments.
The two main types of mortgages are fixed-rate mortgages and variable rate mortgages.
A mortgage is a loan secured by real estate. Whereas a home loan is a broader term for loans used specifically to buy a house.
Depending on their policies, some lenders may offer self-employed mortgages that consider alternative income proof, such as tax returns, bank statements, or business financials, instead of traditional salary slips.
25 March 2025
7 mins read
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