Mortgage Explained by R Rama

A mortgage is a form of a secured loan, which means that a loan can be availed in lieu of collateral, mostly real estate. In French, mortgage means 'dead pledge'. In a mortgage agreement, a consumer gives a lien to a lender as security for the repayment of a loan. This means that a piece of real estate is provided as security to a lender by the borrower. The lender can take possession of the property if the borrower fails to repay the loan in full. The borrower, called the mortgagor, pledges real property to the lender, the mortgagee, as security against the debt, which is called hypothecation.

Mortgages are more-or-less long term secured loans and usually repayment periods span through many years. The amount of capital that is borrowed through mortgages is also usually high. Since the risk of the borrower is less considering the fact that they have a solid asset as security, most mortgages carry lower interests compared to unsecured loans. However, the risk of the borrower is high because they stand to lose collateral, which is many times the value of the loan, if they fail to repay their loans for some reason.

In the case of mortgages, the profits made by banks are proportional to the tenure of the loan. Hence, long-paying loans accrue more profits to the banks by way of higher interests. As far as the customer is concerned, short loans will require them to pay higher monthly instalments while longer loans will require them to pay lower instalments. Some banks also allow repayment holidays on certain mortgage loans. Such mortgage loans are called as flexible mortgage loans. Flexible mortgage loans are ideal for people who have varying incomes and whose repayment schedules are not regular.

Since mortgage loans involve collateral, banks usually offer more facilities on existing mortgage loans. As a result, consumers can refinance a mortgage loan and transfer their loan to another provider for a better offer. Consumers can re-mortgage a property after assessing the benefits that they may get through the process. This allows them to transfer their mortgage from one financing company to another that provides a better deal on their property.

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