Mortgage Loan Explained: How It Works, Benefits, and Key Considerations

A mortgage loan is one of the most common ways to unlock the financial value of your property without selling it. In India, mortgage loans—often referred to as loan against property (LAP)—allow individuals to borrow funds by pledging a residential, commercial, or industrial property as security. Understanding how a mortgage loan works is essential for making informed financial decisions.

What Is a Mortgage Loan?

A mortgage loan is a secured loan where you pledge your owned property to borrow money from a bank or NBFC. The property remains with you, but the lender holds the legal charge until the loan is repaid.

In India, mortgage loans are governed by:

Transfer of Property Act, 1882
SARFAESI Act, 2002 (for recovery rules)
Indian Contract Act, 1872

How Does a Mortgage Loan Work?

Here’s the simple step-by-step process:

Application – Submit your KYC, income proof, and property documents.
Property Valuation – Lender verifies legal ownership and market value.
Loan Approval – Banks typically offer 50%–75% of property value.
Agreement & Registration – A formal mortgage deed is executed.
Loan Disbursement – The funds are credited to your account.
Repayment – Through EMIs over a tenure of up to 15–20 years.

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Benefits of a Mortgage Loan

Lower Interest Rates

Since the loan is secured, interest rates are lower compared to personal loans.

Higher Loan Amount

Borrowers can access larger sums depending on property value.

Long Tenure

Repayment periods can be extended, reducing EMI burden.

Property Retains Ownership

You can continue using the property during the loan tenure.

Key Consequences of Mortgage Loans

Debt Burden A mortgage is a long-term liability. Missing EMIs can strain finances and affect your ability to borrow in the future.
Credit Score Impact Defaulting or delaying payments lowers your credit score, making it harder to access future loans or credit cards.
Legal Consequences of Default
- Banks can issue legal notices and initiate recovery proceedings.
- Under the SARFAESI Act, lenders can seize and auction the property without court intervention if repayment fails.
- Persistent default may even lead to criminal liability in cases of fraud or misrepresentation.
Loss of Property While you retain ownership during the loan tenure, defaulting means the lender can legally repossess and sell the property to recover dues.
Emotional & Social Stress Loan defaults often bring emotional distress, family pressure, and reputational damage in society.
Opportunity Cost Long repayment tenures tie up income for years, limiting flexibility to invest in other opportunities

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Eligibility Criteria for Mortgage Loan

Eligibility depends on:

Age (usually 21–65 years)
Stable income or business profits
Clean credit history
Clear title of property

Legal Considerations in India

Before taking a mortgage loan, ensure:

Property has clear ownership and updated title records.
All encumbrances are checked through an EC (Encumbrance Certificate).
Mortgage deed is properly registered as per state stamp duty laws.
Check lender’s SARFAESI compliance for legal clarity.

For reference, you can explore RBI’s guidelines on secured lending (search on RBI’s official website).

Key Considerations Before Availing a Mortgage Loan

Compare interest rates across lenders.
Understand foreclosure and pre-payment charges.
Ensure you can comfortably repay EMIs.
Keep property insurance updated.

Important terms

Encumbrance Certificate: Issued by a land records authority, an Encumbrance Certificate certifies whether a property has any registered financial or legal liabilities, known as encumbrances, during a specified period. This document provides a historical overview of all registered transactions related to the property. It confirms the property’s status, indicating if it is free from claims such as mortgages, liens, or legal disputes.
The SARFAESI Act, or Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, empowers banks and financial institutions to recover non-performing assets (NPAs) without court intervention. If a borrower defaults on a secured loan, the lender can seize and auction residential or commercial properties pledged as security, except agricultural land, which is exempt.
The Act applies only to secured loans backed by assets such as mortgages, pledges, or hypothecation. For unsecured loans, banks must approach the civil courts to initiate recovery.
By streamlining the asset recovery process, SARFAESI helps reduce delays in handling defaults and improves overall credit discipline in the financial system.
Transfer of Property Act, 1882
Indian Contract Act, 1872