Tuesday, 10 July 2012

Types of Mortgages

According to Section 58 of the Transfer of Property Act, 1882, a mortgage is 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 agreement which may give rise to pecuniary liability.

The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest the payment of which is secured for the time being are called the mortgage money and the instrument by which the transfer is effected is called the mortgage deed.

Essentials of a Mortgage:
  1. Transfer of Interest: The first thing to note is that a mortgage is a transfer of interest in the specific immovable property. The mortgagor as an owner of the property possesses all the interests in it, and when he mortgages the property to secure a loan, he only parts with a part of the interest in that property in favour of the mortgagee. After mortgage, the interest of the mortgagor is reduced by the interest which has been transferred to the mortgagee. His ownership has become less for the time being by the interest which he has parted with in favour of the mortgagee. If the mortgagor transfers this property, the transferee gets it subject to the right of the mortgagee to recover from it what is due to him i.e., the principal plus interest.
  2. Specific Immovable Property: The second point is that the property must be specifically mentioned in the mortgage deed. Where, for instance, the mortgagor stated “all of my property” in the mortgage deed, it was held by the Court that this was not a mortgage. The reason why the immovable property must be distinctly and specifically mentioned in the mortgage deed is that, in case the mortgagor fails to repay the loan the Court is in a position to grant a decree for the sale of any particular property on a suit by the mortgagee.
  3. To Secure the Payment of a Loan: Another characteristic of a mortgage is that the transaction is for the purpose of securing the payment of a loan or the performance of an obligation which may give rise to pecuniary liability. It may be for the purpose of obtaining a loan, or if a loan has already been granted to secure the repayment of such loan. There is thus a debt and the relationship between the mortgagor and the mortgagee is that of debtor and creditor. When A borrows 100 bags of paddy from B on a mortgage and agrees to return an equal quantity of paddy and a further quantity by way of interest, it is a mortgage transaction for the performance of an obligation.
Where, however, a person borrows money and agrees with the creditor that till the debt is repaid he will not alienate his property, the transaction does not amount to a mortgage. Here the person merely says that he will not transfer his property till he has repaid the debt; he does not transfer any interest in the property to the creditor. In a sale, as distinguished from a mortgage, all the interests or rights or ownership are transferred to the purchaser. In a mortgage, as stated earlier, only part of the interest is transferred to the mortgagee, some of them remains vested in the mortgagor.

To sum up, it may be stated that there are three outstanding characteristics of a mortgage:
  1. The mortgagee’s interest in the property mortgaged terminates upon the performance of the obligation secured by the mortgage.
  2. The mortgagee has a right of foreclosure upon the mortgagor’s failure to perform.
  3. The mortgagor has a right to redeem or regain the property on repayment of the debt or performance of the obligation.
Difference between Mortgage and Charge:
  • A mortgage is created by the act of the parties whereas a charge may be created either through the act of parties or by operation of law.
  • A charge created by operation of law does not require the registration as prescribed for mortgage under the Transfer of Property Act. But a charge created by act of parties requires registration.
  • A mortgage is for a fixed term whereas the charge may be in perpetuity.
  • A simple mortgage carries personal liability unless excluded by express contract. But in case of charge, no personal liability is created. But where a charge is the result of a contract, there may be a personal remedy.
  • A charge only gives a right to receive payment out of a particular property, a mortgage is a transfer of an interest in specific immovable property.
  • A mortgage is a transfer of an interest in a specific immovable property, but there is no such transfer of interest in the case of a charge. Charge does not operate as transfer of an interest in the property and a transferee of the property gets the property free from the charge provided he purchases it for value without notice of the charge.
  • A mortgage is good against subsequent transferees, but a charge is good against subsequent transferees with notice.

Types of Mortgage:
  1. Simple Mortgage
  2. Mortgage by Conditional Sale
  3. Usufructuary Mortgage
  4. English Mortgage
  5. Mortgage by deposit of title Deed
  6. Anomalous mortgage
1. Simple Mortgage
A simple mortgage does not involve giving the possession of the mortgagor's property to the mortgagee. It is under mutual agreement that in case of non-payment by the mortgagee to the mortgagor within the specified time, the mortgagee can cause the mortgaged property to be sold in accordance with law and have the sale proceeds adjusted towards the payment of the mortgage money.

2. Mortgage by Conditional Sale
This type of mortgage entails the apparent sale of property by the mortgagor to the mortgagee on a conditional basis, that on default by mortgagor, the sale shall become absolute and complete. If the mortgagor repays his loan, the sale shall become null and void.

3. Usufructuary Mortgage
This type of mortgage, by an express or implied term gives possession to the lender and gives him rights to accrue the rents or income coming from that property as repayment for interest and mortgage money till the time repayment is complete. There is no time limit for payment of the mortgage money.

4. English Mortgage
The mortgagor transfers the mortgaged property to the mortgagee in entirety. However there is a condition that on complete repayment of the repayment money, he will re-transfer the property back to himself.

5. Reverse Mortgage
Reverse mortgage involves lending money to senior citizens against mortgage of their property (house) and there is no need of repaying the same. The loan is awarded as a lump sum amount or as monthly installments. In the event of death of the mortgagor, the property goes into the possession of the mortgagee.

6. Anomalous Mortgage
A mortgage that does not fall under the purview of any of the mortgage types is called an anomalous mortgage.

Conditions attached with mortgage
  1. While mortgaging property, only legal rights are transferred to the mortgagee but not the possession.
  2. An instrument of mortgage deed is mandatory.
  3. On sale of a mortgaged property, the mortgage flows along with the property.
Source :www.indianrealtylaw.com

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