Thursday, 8 January 2015

Mortgaging Property: Breaking psychological barriers

A property is a valuable asset. Not only does its value increase over time, it can be mortgaged to make good use of it financially as well.

A property owner can consider mortgage to raise money for a wedding, investment in business, higher education of children, among others. However, before dwelling on mortgaging, it is crucial to understand its nitty-gritties.

Mortgaging property when loan is on:
When loan is on and the property is already mortgaged to a financier, one cannot mortgage the property again. However, in special circumstances a ‘pari-passu’ mortgage or a ‘Second mortgage’ can be created with the consent of the financier who has the First Mortgage.

Mortgaging helps the financier in securing money that has been advanced as loan to the customer. For a customer, mortgaging his property could help him avail finance for any legitimate purpose. Yes, one can avail a loan without offering a mortgage as well, but Secured Loan (loan taken against security) are cheaper than unsecured loans.

Inability in loan repayment:
If the borrower is unable to repay the loan, the lending institution that has the mortgage of the property, can invoke the mortgage as per legal provisions applicable to that institution. Invoking the mortgage would mean going to the court and following a legal procedure to take possession of the mortgaged property and selling it to recover the overdue amount. Depending on the reasons for default, there could be other repercussions also for the borrower, i.e. if any fraud is detected, the borrower could also be tried under criminal laws.

If there is a delay in payment it would attract penal interest. The borrower would be required to pay the actual due amount and some additional/penal interest on top of it.

Interest rate on mortgaged property:
Interest on mortgaged property is payable on a monthly basis. It could range from 10-15 per cent or even more depending on the type of loan availed, the lending institution, the borrower’s profile etc. Usually loans to purchase homes would be cheaper than Loan Against Properties (i.e. Loan taken against an existing property for some other purpose like travel or business).

Repayment with surplus funds:
If one has surplus funds, one can repay the entire loan after some time (usually anytime after six months from the date of borrowing). It is not necessary to serve the whole repayment period. In fact a large majority of loans in the market do not serve the entire repayment period.

Vacating mortgaged property on default:
A delay of one or two months, with a clear intent to make good the default, may not result in the borrower being asked to vacate the property. However, if the delay becomes chronic (over 4 months and remains at that stage for a prolonged period or worsens), may get the borrower tried under law.  After the legal procedure starts, depending on the type of legal procedure adopted by the financier, it could take anywhere between six months to 1.5 years for the lender to take possession of the property.

Selling mortgaged property:
A mortgaged property cannot be sold without the consent of the lender to whom the property is mortgaged, especially if the loan is in default.  If the loan is not in default, the property owner can sell the property and get his loan transferred to the buyer, by keeping the lender in the loop.


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