Registered Mortgage vs. Equitable Mortgage: Key Differences

The term mortgage was first defined by the Transfer of Property Act, of 1882. In many ways, borrowing money against land or having to give up on your home due to a deep burden of loans has been in practice since times immemorial. Animals, farmlands, precious goods – everything was once considered property you could loan against based on local rules and regulations, or the lack thereof.

Over the decades, the world of finance and banking has regularised loans against properties and mortgage loans. Let’s take a look at two primary categories of mortgage loans:

What is the meaning of a mortgage?
 

A mortgage, in simple terms, is a financial arrangement that helps you buy a home when you don't have enough money to pay for it all at once. It's like a long-term loan specifically for purchasing property. Here's how it works:

You find a home you want to buy, but you can't afford to pay the full price upfront. So, you approach a bank or a mortgage lender. They agree to lend you the money you need to buy the house, and in return, you promise to pay it back over a long period, often 25 to 30 years.

This borrowed money is called the 'mortgage loan'. You agree to make regular payments to repay the loan, and these payments cover both the loan amount and interest. The house you buy serves as collateral, meaning if you can't make your payments, the lender could take the house back.

Once you've repaid the loan in full, you own the house outright. Mortgages make homeownership possible for many people by spreading the cost over time, but it's essential to choose one that aligns with your finances.

However, it can get a bit more complicated when the conditions of the loan are decided completely by the mortgagor and the mortgagee without the involvement of any third party or even government body. That’s where the term “equitable mortgage” comes into play. The word equity stands for “in the interest of justice” in this context. Let us understand more about equitable mortgage.

What is an equitable mortgage?
 

An equitable mortgage is a legal arrangement where a borrower offers their property as security for a loan without transferring ownership to the lender. In this type of mortgage, the lender holds an equitable interest in the property, giving it the right to sell it if the borrower fails to repay the loan.

Equitable mortgages are often used when a formal mortgage deed cannot be executed immediately, providing a temporary solution for borrowers in need of funds while protecting the lender's interests in the property. It's a safeguarded way to obtain a loan using property as collateral without a formal mortgage deed.

Importance of understanding an equitable mortgage
 

Understanding equitable mortgages is crucial because it safeguards both borrowers and lenders in property transactions. For borrowers, it allows them to secure loans using their property as collateral without giving up ownership. This can be a lifeline during financial needs. For lenders, it ensures they have a legal claim to the property if the borrower defaults, reducing the risk of losing their investment. Proper comprehension of equitable mortgages helps in making informed financial decisions and ensures that property transactions are conducted fairly and legally. It's like a safety net, providing financial support while preserving property ownership rights and legal protections for both parties involved.

What is a registered mortgage?
 

A registered mortgage is a legal agreement where a borrower uses their property as collateral for a loan, and this arrangement is officially recorded with a government authority, typically a land registry. By registering the mortgage, both the borrower and lender establish a public record of their interests in the property. This protects the lender's rights in case of non-payment and ensures transparency in property transactions. It also prevents the property from being sold or transferred without the lender's knowledge, offering a secure way to provide loans based on property while maintaining legal clarity and protection for all parties involved.

Key differences between an equitable mortgage and registered mortgage
 

Here are the notable differences between equitable mortgage and registered mortgage:

Equitable mortgage:
 

• Formal documentation: Equitable mortgages are based on an informal agreement and do not require a formal mortgage deed.
• Registration: They are not registered with a government authority like a land registry, making them less visible to the public.
• Proof of loan: Often relies on oral or written agreements as proof of the loan's existence.
• Enforcement: In case of default, the lender's claim to the property may be more challenging to prove and enforce in court.
• Visibility: Typically, only the parties involved in the mortgage are aware of its existence.
• Risk: There may be a higher risk for lenders, as the mortgage may not offer the same level of legal protection and clarity as a registered mortgage.
• Common usage: Equitable mortgages are commonly used when a formal mortgage deed cannot be executed immediately, providing a temporary solution.

Registered mortgage:
 

• Formal documentation: Requires a formal mortgage deed signed by both parties, with all terms and conditions clearly specified.
• Registration: Must be officially registered with a government authority, such as a land registry, creating a public record of the mortgage.
• Proof of loan: The mortgage deed itself serves as concrete proof of the loan's existence and terms.
• Enforcement: In case of default, the lender has a well-documented and legally enforceable claim to the property.
• Visibility: Easily visible to the public, potential buyers, and other interested parties, providing transparency.
• Risk: Offers lenders greater legal protection and a clearer path for property repossession in case of non-payment.

Common usage: Registered mortgages are the standard in property transactions, providing security and legal clarity for both borrowers and lenders.

Conclusion
 

The distinction between equitable mortgages and registered mortgages is significant in the world of property financing. Equitable mortgages offer flexibility and a temporary solution, often relying on informal agreements, but they come with a higher level of risk and fewer legal protections.
On the other hand, registered mortgages provide a structured and secure framework for both borrowers and lenders. They are transparent, legally enforceable, and widely accepted in property transactions. Choosing between the two depends on individual circumstances, but understanding these differences is essential for making informed decisions in real estate and financial matters.

Have other questions regarding the terms and conditions to avail a Loan Against Property? We’ve answered a whole bunch of queries here.

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