Definition of Equitable Mortgage
As per Indian Transfer of Property Act, Mortgage is defined as— the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being are called the mortgage-money, and the instrument (if any) by which the transfer is affected is called a mortgage-deed.
In Equitable Mortgage also known as the mortgage by oral deposition of title deeds, the mortgage is created merely by oral deposit of title deeds to the lender and executing a memorandum of deposit of title deeds, which means there is no change in ownership of the property and borrower continues to enjoy the possession of his/her property during the mortgage period. The title documents of the property continue to remain in possession of lender for the duration of mortgage and are released back to borrower, either on lapse of the tenor or payment of the mortgage.
Background of Equitable Mortgage.
The rise and popularity of the Equitable Mortgage has its origin in the Great Depression of 1930’s. Prior to this period, Balloon payment was the common form of mortgage where the financing used to be at 50% of the property value ,followed by bulk payments for repayment of loan.
Following the great depression, there was not enough liquidity in the hands of buyers to shell out 50% of the payment upfront for purchase of properties. Also the payment of bulk amounts for repayment of mortgage became difficult. In order to boost the housing industry equitable mortgage came in to practise, since thisrequired buyers to pay 10%-20% of the property value upfront, rest to be financed by lenders. Repayment process was also designed in the form of monthly EMI’s instead of one time bulk payments, creating the win-win situation for both lender as well as borrower.
Features & Characteristics Equitable Mortgage
a) Unlike registered mortgage,in Equitable mortgage, there is no change in ownership of the property, rather borrower obtains loan/mortgage by depositing title documents of the property to lender for obtaining mortgage.
b) The borrower continues to possess the property and enjoy the benefits during the tenor of mortgage.
c) This is a long-term mortgage varying from 5 year-30 years.
d) Borrower is required to make monthly payments, known as EMI(Equated Monthly Instalments) to lender for paying back the loan amount.
e) EMI comprises of Principal loan & accrued interest.
f) The property documents are released back to borrower, either on completion of mortgage period or payment of the loan amount, whichever is earlier.
g) The foreclosure of loan prior to lapse of mortgage period is allowed in this mortgage, however the foreclosure charges may be at the discretion of lender.
h) The deposit of title deed may or may not be accompanied by a written Memorandum of Deposit of Title deed.
i) Equitable Mortgage can be effectuated only in notified towns and cities.
j) This is the most common form of mortgage, which is commonly extended by banks and financial institutions.
k) Since Equitable mortgage requires monthly payment of instalments for repayment of loan, lenders assess the financial stability of the borrowers and their capacity to payback the loan via monthly instalments
l) In case of default by borrower, the lender can take the possession of the mortgaged property after obtaining legal order from the appropriate court of law.
Advantages of Equitable Mortgage
o The process for creation of equitable mortgage is simple and easy
o It is a low-cost process, since it doesn’t require the change in ownership of the property. Consequently, no stamp duty and registration charges are payable
o No legal process needs to be followed at the time of creation of mortgage. The lender and borrower are not required to visit the sub-registrar office for creation and/or release of mortgage.
o Documents can be released back to borrower without having to go through any formal process at the time of mortgage release
o The Equitable mortgage has been responsible for increasing the sales in housing projects and boosting the real estate sector, as it makes it easier for the buyers to obtain loan for purchase of property.
o The Equitable mortgage is extended by banks and financial institutions operating in organized sector, hence the process is very much organized, transparent and regulated.
o In case of any dispute or irregularities, borrowers in India have the option of reaching out to regulators link NHB(National Housing Bank) & RBI(Reserve Bank of India) for redressal of their grievances.
Risks of Equitable Mortgage
o No legal documentation needs to be executed for creation of equitable mortgage and therefore it is known only to the borrower and lender.The borrower can conceal the mortgage and sell the property to any third party by hiding the facts
o There is no record of equitable mortgage in registrar office and therefore there is no way of checking whether a particular property is mortgaged unless disclosed by the property owner.
o The easy and simple process makes it easier for the borrowers to indulge in corrupt practises like multiple sale, multiple mortgages, not making the timely repayments etc.
o The creation of equitable mortgage is not preceded by legal process, hence taking the possession of property in case of default by borrower becomes an arduous task and requires permission from court.
o High penetration of the equitable mortgage in housing sales has its repercussions in case of an economic downturn. The default in loans increases the availability of properties for sale in market, which adversely impacts the property prices and thereby real estate sales.
With this we come to the end of MORTGAGE SERIES. We have covered 5 types of Mortgages as per Indian transfer of property act as under:
3. English Mortgage
4. Mortgage by Conditional Sale
5. Equitable Mortgage
The sixth type of mortgage is Anomalous mortgage, which is a name given to mortgage which doesn’t classifies among any of the above-mentioned categories.
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