A mortgage is the transfer of an interest in the specific immovable property to secure the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement that may give rise to a pecuniary liability.
Characteristics of Mortgage
- A mortgage can be effected only on immovable property. The immovable property includes land, benefits that arise out of things attached to the earth like trees, buildings, and machinery. But a machine that is not permanently fixed to the earth and is shiftable from one place to another is not considered to be immovable property.
- A mortgage is the transfer of an interest in the specific immovable property and differs from a sale wherein the ownership of the property is transferred. Transfer of an interest in the property means that the owner transfers some of the rights of ownership to the mortgagee and retains the remaining rights with himself. For example, a mortgagor retains the right to redeem the property mortgaged.
- The object of transfer of an interest in the property must be to secure a loan or performance of a contract which results in monetary obligation. Transfer of property for purposes other than the above will not amount to the mortgage. For example, a property transferred to liquidate prior debt will not constitute a mortgage.
- The property to be mortgaged must be a specific one, i.e.; It can be identified by its size, location, boundaries, etc.
- The actual possession of the mortgaged property need not always be transferred to the mortgagee.
- The interest in the mortgaged property is re-conveyed to the mortgage on repayment of the loan with interest due on.
- In case the mortgager fails to repay the loan, the mortgagee gets the right to recover the debt out of the sale proceeds of the mortgaged property.
Different Types of Mortgage
6 types of mortgages are;
- Simple mortgage,
- Mortgage by conditional sale,
- Usufructuary mortgage,
- English mortgage,
- Mortgage by deposit of title deeds, and
- Anomalous mortgage
These are described below;
A simple mortgage is one where;
Without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage money and agrees expressly or impliedly that in the event of his failure to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold. The proceeds of the sale to be applied so far may be necessary, m the payment of the mortgage money.
However, the mortgagee cannot directly sell the property. The sale must be through the intervention of the court.
The mortgagee will have to obtain first a decree from the court for the sale of the mortgaged property since the words used are “cause the mortgaged property to be sold.”
Mortgage by conditional sale
Mortgage by conditional sale is one where the mortgagor ostensibly sells the mortgaged property on the condition that –
- On default of payment of the mortgage money on a certain date, the sale shall become absolute, or
- On such payment being made, the sale shall become void, or
- On such payment being made, the buyer shall transfer the property to the seller.
A usufructuary mortgage is one where the mortgagor delivers or agrees to deliver the possession of the mortgaged property to the mortgagee and authorizes him –
- To retain such possession until payment of the mortgage money,
- To receive the whole or any part of the rents and profits accruing from the property, and
- To appropriate such rents or profits; (i) in lieu of interest, or (ii) in payment of the mortgage money, or (iii) partly in lieu of interest and partly in lieu of the mortgage money.
English mortgage has the following characteristics:
- The mortgagor makes a personal promise to repay the mortgage money on a certain day.
- The property mortgaged is transferred to the mortgagee. The mortgagee, therefore, is entitled to take immediate possession of the property. He/She may, under certain circumstances, sell the mortgaged property without the intervention of the court.
- The transfer is subject to this condition that the mortgagee will re-transfer the property to the mortgagor upon making payment of the mortgage money as agreed.
Mortgage by deposit, of title deeds
A person delivers to a creditor or his/her agent documents of title to the immovable property to create a security thereon. The transaction is called a mortgage by deposit of title deeds.
This mortgage does not require registration. It is the most popular with banks.
A mortgage other than any of the mortgages explained so far. It is an anomalous mortgage.
Such a mortgage includes a mortgage formed by the combination of two or more types of mortgages, as explained above.
It may, therefore, take various forms depending upon custom, local usage, or contract.
Legal Mortgage and Equitable Mortgage – Advantages and Disadvantages
Based on the transfer of title to the mortgaged property, mortgages are divided into types, namely:
- Legal Mortgage
- Equitable Mortgage
In a legal mortgage, the legal title to the property is transferred in favor of the mortgagee by a deed.
The deed is to be registered when the principal money is Rs.100 or more. On repayment of the loan, the legal title is re-transferred to the mortgagor.
The method of creating a charge is expensive as it involves registration charges and stamp duty.
An equitable mortgage is affected by the delivery of documents of title to the property to the mortgagee.
Through the Memorandum of deposit, the mortgagor undertakes to grant a legal mortgage if he fails to pay the mortgage money.
- No registration is required for an inequitable mortgage, and so stamp duty is saved.
- It involves minimum formalities.
- The information regarding such a mortgage is kept confidential between the lender and the borrower. So the reputation of the borrower is not affected.
- If the mortgagor fails to repay, the mortgagee must get a decree for the sale of the property. Getting a degree is expensive and time-consuming.
- The borrower may hold the title deeds not on his account but in the capacity of a trustee. If an equitable charge is created, the claim of the beneficiary under the trust will prevail over the equitable mortgage.
- There is the risk of a subsequent legal mortgage in favor of another party. If the equitable mortgagee parts with security, the debtor may create a second legal mortgage over the same property, even for a short period.