A mortgage loan is loan secured by real property, e.g. real estate. In most jurisdictions, this means that if you don’t follow the repayment schedule for the loan, the lender has the right to sell the secured property and seek compensation from the money derived from the sale.
With non-recourse mortgage loans, the borrower is not obliged to pay for any difference between the owed amount and the amount that goes to the lender after the forced sale of the secured property. Example: Borrower owes $1 million to the lender. Borrower stops making payments on the loan. The lender forces a sale of the real estate and it brings in $800,000 to the lender. With a non-recourse mortgage loan, the lender is not allowed to demand the missing $200,000 from the borrower. Because of this, a lender will typically require a bigger margin between real estate value and mortgage loan size when you apply for a non-recourse mortgage loan.
Lower risk for the lender = better terms for the borrower
- A secured loan is generally seen as lower risk for the lender than an unsecured loan.
- Real estate is generally seen as better security than many other assets, such as boats and cars.
These two points mean that if you have real estate to put up as security for your loan, you should be able to negotiate pretty good terms and conditions for the loan. It might for instance be possible for you to get a $500,000 mortgage loan even though the same lender would never give you a $100,000 unsecured loan or a $100,000 car loan.
It is also true that the interest rate tend to be lower on mortgage loans than on other loans. This is not just because they are low-risk loans, but also because they tend to be large loans. Even with a low annual interest rate, the administrative costs associated with the loan will be small compared to the interest paid by the borrower to the lender over the life of the loan.
In some countries, it is legally or administratively complicated for a lender to force a sale of mortgaged real estate. It might for instance be illegal or very difficult to evict a family with children from their residence even if the family fails to make payments on time. There are also areas where the market for real estate doesn’t have a high liquidity, which means that a lender can be stuck with unsold real estate for a long time after a foreclosure. Factors such as these tend to make it considerably more difficult to obtain a mortgage loan, and the terms for the loan will be less beneficial for the borrower since the security isn’t really worth much for the lender if push comes to shove.