Mortgage-Backed Loan: Features, Risks, and Advantages

We explain the advantages of a secured loan over a regular consumer loan, what restrictions are imposed on a property used as collateral, and what happens if loan payments are not made on time.

How a Mortgage-Backed Loan Differs from a Regular Loan

Availability of Collateral

For a regular loan, the bank does not take the borrower’s property as collateral — the money can be obtained and spent at the borrower’s discretion, without providing additional guarantees.

To obtain a regular loan, one needs to have:

• A stable income sufficient to repay payments on time;
• A positive credit history without delinquencies;
• A high credit score — an assessment of the credit history in points from 0 to 999;
• An optimal debt load not exceeding 30% — the smaller the portion of income spent on existing loans, the easier it is to get a new loan.

To obtain a mortgage-backed loan, the borrower must meet the same conditions as for a regular loan. In addition, the borrower provides the bank with property as collateral, such as an apartment or a car, until the full repayment of the loan. This is an additional guarantee of repayment for the bank. Sometimes the bank may refuse a regular loan but approve it as a secured loan: in this case, the person can receive the money and spend it for their purposes.

Interest Rate

The interest rate on a mortgage-backed loan is usually lower than on a regular loan: since the bank receives additional security, it can offer the borrower more favorable terms.

Purposes for Using the Loan

A secured loan is better suited for large expenses — for example, for repairs. Considering that the bank receives the apartment as collateral, it can offer a larger amount than a regular loan.

Most lenders offer a higher maximum loan amount when collateral is provided than without. If a small amount is needed for minor expenses and the bank offers a low rate on a regular loan — it is better to take a loan without collateral. But if the bank is unwilling to approve the required amount for a costly goal without collateral, one can provide an apartment or car as security to increase the loan amount. A mortgage-backed loan can also save on overpayments due to a lower interest rate.

Loan Term

Banks usually offer longer terms for mortgage-backed loans than for regular loans.

Requirements for the Borrower

The requirements for a regular loan are usually stricter than for a secured loan, as the risks for the bank are higher without collateral. The bank may refuse a regular loan due to high risks but approve the application if collateral is provided as an additional guarantee of debt repayment.

Restrictions on the Collateral Property

When the apartment is pledged to the bank, it still remains the property of the borrower — ownership rights do not transfer to the lender. However, there are restrictions for the owner until the encumbrance is removed. Banks usually specify in the contract what the borrower can and cannot do with the apartment while it is collateral. Restrictions may vary among lenders.