Kinds Of Mortgage

Understanding the Kinds of Mortgage is crucial for anyone navigating the financial and legal landscape of property loans. A mortgage is a legal arrangement where immovable property is used as collateral to secure a loan. Different types of mortgages cater to diverse financial needs, offering flexibility in terms of ownership, possession, and repayment mechanisms. From simple mortgages to reverse mortgages, each type serves specific purposes, whether it's funding a business, securing a home loan, or planning retirement finances. This guide explores the various kinds of mortgage, their features, practical applications, and how they empower borrowers and lenders in financial agreements.

Kinds Of Mortgage

Simple Mortgage

A simple mortgage involves a borrower pledging immovable property as security for a loan. The borrower retains possession, but the lender has the right to sell the property to recover the debt if the borrower defaults. Legal action is necessary for enforcing the lender’s right to sell.

Legal Features

a. The borrower agrees to personally repay the loan.

b. The lender’s claim on the property is enforceable through a court of law.

Example

A homeowner mortgages their property to a bank for a $50,000 loan to start a business. The house remains in the borrower’s possession, but the lender can initiate legal proceedings for its sale in case of default.

Practical Application

Commonly used in personal and business loans where the borrower requires control of the property.

Mortgage By Conditional Sale

In this type, the borrower ostensibly sells the property to the lender but includes conditions for repurchase upon repayment of the loan. If the borrower defaults, the lender retains ownership.

Legal Features

a. The transfer of ownership is conditional.

b. If the loan is repaid, the sale becomes void; otherwise, it becomes absolute.

Example

• A farmer mortgages their agricultural land to a moneylender with the agreement that ownership reverts to the farmer upon loan repayment within three years. Failure to repay makes the lender the permanent owner.

Practical Application

Used in rural areas or informal setups where immovable property is critical to the borrower.

Usufructuary Mortgage

A usufructuary mortgage grants possession of the mortgaged property to the lender. The lender uses the income from the property (such as rent or profits) to recover the debt. The borrower’s personal liability is not required.

Legal Features

a. The lender does not have the right to sell the property.

b. The income from the property serves as repayment.

Example

• A commercial building owner mortgages the property to secure a $30,000 loan. The lender collects rental income from tenants until the loan is cleared.

Practical Application

Suitable for income-generating properties, particularly in agricultural or rental real estate scenarios.

Also Read : What Is Mortgage?

English Mortgage

In an English mortgage, ownership of the property is transferred to the lender, but with a condition that it will be re-transferred to the borrower upon full repayment of the loan. The borrower remains personally liable for the debt.

Legal Features

a. Ownership temporarily shifts to the lender.

b. The borrower retains the right to redeem the property by repaying the loan.

Example

• A real estate developer mortgages a plot of land to secure funding for a new project. The lender becomes the legal owner of the land until the debt is repaid.

Practical Application

Widely used in large-value transactions where lenders require significant collateral security.

Also Read : Rights And Liabilities Of Mortgagor And Mortgagee

Equitable Mortgage (Mortgage By Deposit Of Title Deeds)

This type of mortgage is created when the borrower deposits title deeds of immovable property with the lender as security for the loan. No formal document is executed, making it less cumbersome and quicker to process.

Legal Features

a. No need for formal agreements; title deeds serve as security.

b. Recognized mainly in urban areas under applicable local laws.

Example

• A borrower deposits the title deed of their apartment with a bank to secure a $100,000 loan for expanding their business.

Practical Application

Preferred for short-term or urgent loans, especially in urban areas where property documentation is straightforward.

Anomalous Mortgage

An anomalous mortgage does not fit into the specific categories mentioned above. It is a hybrid arrangement that combines features of different types of mortgages. The terms of such mortgages are governed by the agreement between the parties.

Legal Features

a. The terms and conditions are unique to the agreement.

b. It may combine elements of usufructuary and simple mortgages or others.

Example

• A borrower transfers partial ownership of a farm to the lender, allowing them to use the land for agricultural purposes until the loan is repaid.

Practical Application

Used in customized financial arrangements that do not adhere to standard mortgage types.

Reverse Mortgage

Reverse mortgages are designed specifically for senior citizens. In this arrangement, individuals mortgage their property to receive periodic payments or a lump sum, ensuring a steady income while retaining possession and residency. The lender recovers the loan by selling the property after the borrower’s demise or relocation.

Legal Features

a. The borrower does not repay the loan during their lifetime.

b. The lender recovers the amount by selling the property.

Example

• A retired individual mortgages their house to a bank and receives monthly payments to cover living expenses. The house is sold after their demise to settle the loan.

Practical Application

Primarily used as a financial planning tool for retirees who wish to monetize their property without selling it.

Comparison Of Different Mortgage Types

Comparison among different types of mortgage are as follows -

Conclusion

Mortgages are a cornerstone of the real estate and financial sectors, offering varied ways for borrowers to secure loans using immovable property as collateral. Understanding the different types of mortgages is essential for borrowers and lenders alike, as it helps them choose the right option based on individual circumstances. Whether it's a simple mortgage for personal loans, a usufructuary mortgage for income-generating properties, or a reverse mortgage designed for senior citizens, each type of mortgage serves a specific need. By selecting the appropriate mortgage type, both borrowers and lenders can navigate the complexities of financial transactions and real estate dealings with greater clarity and security.

FAQs On Types Of Mortgages

Here are some frequently asked questions (FAQs) to help you better understand the different types of mortgages and their practical applications.

Q1.What is the difference between a simple mortgage and an English mortgage?

In a simple mortgage, the borrower retains possession of the property but the lender can sell it to recover the debt if the borrower defaults. In an English mortgage, the ownership temporarily transfers to the lender, with the property being returned to the borrower upon full repayment of the loan.

Q2.What are the benefits of a reverse mortgage?

A reverse mortgage allows senior citizens to convert their property into a source of income, either through lump sum payments or periodic installments, without having to sell their home. The loan is repaid after the borrower’s death or relocation.

Q3.Can a borrower sell the mortgaged property during the loan tenure?

In most mortgage types, the borrower cannot sell the property without the lender's consent. In a simple mortgage, the lender may initiate a legal sale if the borrower defaults, but the borrower retains possession. In a mortgage by conditional sale, the sale becomes absolute if the borrower fails to repay the loan.

Q4.What is an equitable mortgage, and how does it differ from other types?

An equitable mortgage is created by depositing title deeds with the lender as security for the loan, without the need for formal documentation. It is faster and less cumbersome compared to other mortgage types, making it ideal for short-term or urgent loans.

Q5.Who typically uses a usufructuary mortgage?

A usufructuary mortgage is commonly used for income-generating properties like rental buildings or agricultural land. In this arrangement, the lender collects the income (e.g., rent) from the property until the loan is repaid, without having the right to sell the property.