Mortgage Loan Definitions and Common Terms Explained for First-Time Borrowers

Navigating the world of mortgages can be a difficult challenge for first-time borrowers. To make informed decisions, they need to understand mortgage loans as they come with a lot of varying terms, jargon, and figures. In this guide, we’ll break down key terms that you’re likely to encounter, especially in the Indian context so that you can know what you are getting into when applying for a mortgage loan.

What is a Mortgage Loan?

A mortgage loan is a type of loan where a borrower borrows money from a lender to purchase property, with the property itself serving as security. If the borrower is unable to repay the loan, the lender can repossess the property.

Mortgage loans are very popular in India, especially with people who want to purchase homes. In order to help you achieve your dream of having your own home, most Indian banks and financial institutions offer different types of mortgage loan products.

Explore key terms

This is a list of common terms that you will be seeing when applying for a mortgage in India.

#1. Principal

It is the amount of money that you borrow at first from the bank or lender without including interest charges on top of that. For instance, if your loan amount is ₹50 lakh, then your principal will be ₹50 lakh alone.

#2. Interest Rate

It’s the rate at which banks charge you as interest on the loan amount. The interest rate may either be fixed or floating:

• Fixed-rate means that your EMI remains steady over the life of the loan;

• Floating rate means that your EMI will not be constant, but instead change based on prevailing market conditions.

For instance, you could start paying anything from seven percent to nine percent per annum for home loans, though this significantly depends on your lender and how much you borrowed.

#3. EMI (Equated Monthly Installment)

This is the amount of money you remit to your lender every month and it covers both principal repayment and interest. The total sum that goes towards EMI is determined by

1. The loan amount.

2. The tenure of the loan (usually ranging from 10 to 30 years).

3. The interest rate.

#4. Loan Tenure

This refers to the length of time over which you agree to repay the full amount. Loans can have tenures that range from 5 to 30 years. The longer the tenure typically means lower EMIs but more total interest paid for a loan period.

#5. Down Payment

Before getting a mortgage loan, you must make a payment towards the cost of the home upfront – this amount is called a down payment in India. The majority of lenders expect you to put in at least 10% to 20% of the property’s value as a down payment while they finance the rest.

#6. Prepayment

It involves one paying off his/her mortgage earlier than what was agreed upon between them and the financial institution (bank). At times, some banks allow making partial or full prepayments. However, you may suffer from penalties, particularly with fixed-rate loans.

#7. Foreclosure

Being able to fully settle your mortgage loan before its expiry date is called foreclosure in banking institutions. For some lenders, there is a cost attached to this action, but for others (in particular those with floating interest rates), it does not attract any unfavourable terms.

#8. Processing Fees

This fee are charged by the banks upon application for home credit. It’s a one-off payment that might range between ₹5,000 to ₹10,000 or more depending on the lending institution as well as the quantum involved.

#9. Mortgage Loan Definitions

Mortgage loan definitions refer to the terms and conditions that govern the agreement between you and the bank with respect to your loan. These include definitions of interest rates, loan tenure, repayment terms, and penalties, among others. Before signing, it is important to understand what these definitions mean since they are in the loan agreement you will sign.

How is Your Mortgage Loan Calculated?

One of the most important things to understand about a mortgage is how banks calculate your monthly EMI. According to the flat balance method used to calculate EMI — the interest charged only depends upon the amount which has been collected on its own.

In order to determine your annual interest on the loan, please provide me with the following details- the loan amount, interest rate, and outstanding loan balance. Below I have given an example so that you can understand this better:

• Loan Amount: ₹50 lakhs
• Interest Rate: 8% per annum
• Loan Tenure: 20 years

The bank will then calculate the interest and the EMI payment according to this data.

The Bottom Line

This is very important for those who are borrowing for the first time to know what mortgage loans are. For instance, one would be better placed to make informed decisions about getting a loan if one understands terms like principal, EMI, interest rate, and tenure among others. It’s always good practice to go through all documents carefully before signing any agreement lest there be regret afterwards, consult with your bank or a financial advisor if you don’t understand something.

Remember always that a mortgage loan is a long-term commitment hence it is necessary to calculate annual interest on a loan wisely and develop a suitable budget for yourself.

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