Mortgagor vs Mortgagee

Getting your own home is a fantastic experience, but mortgages are almost always part of the parcel. Therefore, it is necessary to only choose the right lender but to also meticulously go through the paperwork. At the same time, you should also understand the meaning of important terms before going through with the home loan agreement.

Understanding the difference between mortgagor vs mortgagee when taking out a mortgage or home loan ensures you know what you are getting into.

A mortgagor is a person or group taking out a loan to purchase a home or any other real estate property.

In other words, the mortgagor is the borrower or homeowner in a mortgage loan arrangement, who has pledged the property in question as collateral for the given loan.

The mortgagee is the lender in a mortgage loan agreement. They represent the financial institution providing funding to purchase a piece of real estate or refinance a home loan.

A mortgagee can be a bank, mortgage originator, credit union, or any other financial institution that funds real estate purchases.

Here are the main differences between mortgagor and mortgage

A mortgage is a loan used to fund a real estate purchase, whether it's a residential or commercial property. The terms of a mortgage depend on your credit score and previous credit history. If you pass through the threshold for minimum credit score for the home loan, you may be able to get favourable loan terms and even get pre-approved for the home loan.

Here are some of the main features of mortgages and how they work:

• While the mortgagee provides money for the mortgagor to purchase the desired property, some mortgages may require payment of 10-20 percent of the total property amount as an upfront deposit. This is done to assess the mortgagor’s current financial standing and to ensure they can pay up the rest of the mortgage instalments.

• The mortgagor is responsible for repaying the loan along with interest in the form of monthly instalments within a specified amount of time.

• The lifespan of a mortgage loan can vary. The time depends on the instalment amounts, total loan amount, interest rate, and other factors as well.

• To secure the loan, the mortgagee retains ownership of the property purchased for the duration of the mortgage agreement. If the mortgagor cannot repay according to the loan agreement terms, the mortgagee can sell the property and use the recovered money to recover their losses.

Fixed-rate mortgage

Also called a traditional mortgage, a fixed interest mortgage is one where the interest payable on the mortgage is set from the beginning of the agreement and remains the same throughout the loan term. The instalment payment is also fixed.

But sometimes a fixed interest mortgage may only imply that the interest rate will stay fixed only for a specific period of time. After that, a new, mostly higher, the fixed interest rate will apply.

Fixed-rate mortgages can ensure certainty and protect you from drastic increases in interest rates. However, you can also miss a decrease in the interest rate.

Adjustable-rate mortgage (ARM)

Also referred to as a variable rate mortgage, an Adjustable-rate mortgage has an interest rate that fluctuates throughout the loan. If the lender's interest rate increases, so will your interest rate. You will also enjoy a decreased rate if your lender's interest rate drops.

Several factors may influence loan interest rates in Australia, including:

• Change in cash rate set by the Reserve Bank of Australia.

• Increase in mortgagee's funding costs

• Change in competitor's interest rates, which can also lead to your lender decreasing their rates as well

Split home loans

This type of mortgage allows you to split your mortgage repayment account into two; a fixed rate account and a variable rate account. This in turn enables you to reap the benefit of both.

Interest-only loans

An interest-only mortgage allows mortgagors to repay only interest on the amount borrowed for a specific period. During this period, the principal amount is not reduced. Once the period of interest-only repayments has elapsed, they will resume the typical payment of principal and interest.

Reverse mortgages

Also referred to as home equity loans, reverse mortgages are loans borrowed against the equity of a home. It allows homeowners to use the equity in their home as collateral for borrowing money from a lender.

Under this agreement, the mortgagors will be granted a certain amount of loan against the market value of their home. The interest rate is also lesser in comparison to other general personal loans since there is collateral present.

1 - Submit an application

Just like a personal loan, if you want to apply for a mortgage, the first step is for the mortgagor to submit a loan application to the mortgagee. It is left to the mortgagee to approve or disapprove the application based on their own terms and conditions.

2 - Wait for the approval of the application

The mortgagee will consider certain factors before the application can be approved which can include your credit score, credit history, debt to income level, and housing expense ratio.

Even if the loan is eventually approved, the housing expense ratio and the borrower's debt to income ratio will determine the maximum amount of credit that can be extended to the mortgagor as well as the interest rate.

3 - Review and accept the terms and conditions of the loan

Once the application is approved, the mortgagee has to agree to the terms and conditions laid down in the mortgage contract.

The terms of mortgage contracts vary according to mortgagees. Some of the terms you can expect to see are the loan repayment schedule, payment duration, interest rate, and the time of loan delinquency before loan default occurs.

The contract may also outline the property title and the mortgagee's lien on the property you used as collateral.

As the borrower, you should shop around and choose the mortgagor carefully. Read through the terms and conditions of the mortgage agreement and ensure you can afford it before signing any documents.

Your credit score and credit report are important factors to be considered by the mortgagee during your loan application.

With ClearScore, you can check your free credit reports and check credit score to determine your mortgage loan eligibility. Take a look.