What is Mortgage ? Types of Mortgages
What is mortgage?
So before we understand the types of mortgage, let us understand what is mortgage. This is clearly defined under the Transfer of Property Act 1882. Section 58 defines mortgage, mortgagor, mortgagee, mortgage money and mortgage-deed. Now before we come to the exact definition, let us first understand the concept of mortgage.
What is the Concept of Mortgage?
Let’s try to understand with an example. Suppose this is a property. Let’s say the owner has some loan requirement, some money is required. He goes to a bank or goes to any individual, which we call a lender. So now whoever the lender is, the bank or lenders will sign an agreement before paying the money which is called a mortgage deed. Or it can also be called a loan agreement. After that this lender will give the money to him. Basically I am writing here the principal. The bank or lender will give the main amount to the owner.
And he who is the owner of this property will promise the bank to return the money within the mortgage deed. That I will repay the principal and interest portion as much as is due to the banks for which time he has taken the loan.
So in return, there is a risk for the bank. So, that is why bank will mortgage this property. The bank will give him a loan against this property. If something happens during this time, due to any reason, he is not able to pay the loan, then the bank will sell this property. Bank can recover the loan.
So the bank has got a kind of interest which means interest in this property. This interest means one type of right, Right to Sell. This means the bank can recover its loan by selling this property. Now see this is only one right. If the owner is not able to pay, only then bank can try to sell this property. That’s why the ownership remains with the owner. Ownership is not transferred to the bank.
Section 58
So, this is all information is mentioned under section 58. Let’s try to read and understand it. A mortgage is the transfer of an interest. It is clearly written here. Of an interest means a right is transferred. Ownership is not transferred here.
In specific immovable property. So, it means that any property against which loan is being taken, whichever property is being mortgaged, the bank can recover the loan only by selling the particular property. Let’s say this owner has 5 properties. So the bank has no right on the remaining 4 properties, the bank cannot touch those properties. So, that’s why this specific immovable property is clearly mentioned in the mortgage deed.
For the purpose of securing the payment of money advanced or to be advanced by way of loan. It means that the bank is securing the money which is given as loan. Now, what could this money be? An existing or future debt. Either bank has already given loan, bank has already given current loan, the property is mortgaged to recover this loan.
Then suppose you have kept this property as a mortgage. So against the same property, if he wants to take a loan in the future, still, the property can be mortgaged. Or the performance of an engagement which may give rise to a pecuniary liability. Right now, it is not necessary that the liability is against loans only. If any other legal obligation of any kind is made to this particular owner.
Monetary obligation
Pecuniary liability means the legal monetary obligation is to give money to the lender. Even then mortgage can be created in this way.
So I think here you have clearly understood the concept of mortgage.
Mortgagor
What is given here, transferrer is who is transferring right. That is, the owner of this property is also called a mortgagor. So this Owner is your mortgagor.
The transferee is a Mortgagee. So, now the interest is transferred to the lender. The rights are transferred to the lender, he became Mortgagee.
The principal money and interest of which payment is secured for the time being are called the Mortgage-money. This means that the owner has promised that I will return both the principal and interest to you. Mortgage money is the combination of both the principal and the interest.
Here you do not have to be confused, here we are not talking about only principal, both principal and interest are recovered by selling the house or whatever is a movable property, then both principal and interest are combined into mortgage money.
And the instrument by which the transfer is effected is called a Mortgage deed. So, whatever document is signed, whatever terms and conditions have been written, we call it Mortgage deed. And we can also call it a loan agreement, it can be called by multiple names, but if we talk about the definition, then we call it Mortgage deed.
Other Important Sections
Now, let’s see the other important sections related to this. You can see that it is written in section 70 – Accession to Mortgage Property. Accession means addition.
Whatever property is mortgaged, if there is some addition in it, suppose you have built a house on top of an empty land or you had two rooms already made and you made two more.
Accession to Mortgaged Property
So what happens in such a case, if, after the date of mortgage, any accession is made to the mortgaged property, the mortgagee who is the lender, in the absence of a contract by the contrary, shall, for the purpose of the security, be entitled to such accession.
This means that whatever accession has been done will also be a mortgage.
So if we take this example, suppose this owner has a land and suppose he had taken a loan on it, and after taking the loan, he builds a house on it, then the interest will be charged on the land as well as the interest on this house.
And the interest will be right of the bank. By selling the entire house, the bank can recover the loan. It means the bank can make a recovery by selling both the land and the house.
So, you should know about this. So, these were the important clauses related to mortgage.
Types of Mortgages
All types of mortgages are defined within section 58 itself. There are 6 types of mortgages in total. Now we will see them one by one.
1.Simple Mortgage
This is a very common mortgage used in India. And if we register it in Sub Registrar’s office, then we call it registered mortgage. And this registered mortgage is quite common in India. So that’s why you should consider it a little carefully.
Where, without delivering possession of the mortgaged property, the possession which is there remains with the owner only. Possession and ownership is with the owner.
But an interest is getting transferred to the bank. The mortgagor binds himself personally to pay the mortgages money, and agrees, expressly or impliedly, that, in the event of his failing to pay according to his contract, the mortgagee shall have the right to cause the mortgaged property to be sold.
So what kind of interest is transferred here, right to sale is transferred here. The bank can’t sell the property directly, the bank has to go to court, or there should be such clauses mentioned in the mortgages deed. We will also learn about its exact process.
But an interest has been transferred to the bank or to whatever lender it is, that he can recover his loan by selling the property. This means that the mortgages money can recover both the principal + interest.
The process of sale to be applied
So far as may be necessary, in payment of the mortgage-money. Whatever money comes over the mortgage money, it will be returned to the owner. But the bank can make full recovery of its loan.
The transaction is called a simple mortgage and the mortgagee a simple mortgagee. So in such a case, we call it a simple mortgage.
As I said earlier, if we register the simple mortgage, then it becomes registered mortgage. You can register it by going to the Sub Registrar’s office. If you have a lot of agricultural lands or a house, you can get all these easily registered mortgages. So this is the matter of simple mortgage.
2.Mortgage by Conditional Sale
It is not used much in India, but it’s not that you can’t use it. It’s legally valid, it can be used, but is rarely used in India.
So, what happens in it is, where the mortgagor ostensibly sells the mortgaged property. The owner is basically selling the property to the bank, but this is a conditional sale. It’s not fully sold. Exact rights not getting transferred. Total ownership is not transferred. It’s a conditional sale that it may be a complete sale after certain conditions are met. And if this condition is not met, then this sale can also be returned.
So let’s see what are the conditions included in it. On condition that on default of payment of the mortgage money on a certain date the sale shall become absolute. It means that if the principal + interest, which is your total money, if the owner is not able to pay it, then this condition will be removed and it will be considered as a proper sale, it will be an absolute sale. The bank will become the proper owner if it defaults.
Or on condition that on such payment being made the sale shall become void. What could be another condition, on condition that on such payment being made the buyer shall transfer the property to the seller. So the condition can also be written in this way.
The transaction is called mortgage by conditional sale.
Provided that no such transaction shall be deemed to be a mortgage unless the condition is embodied in the document which effects or purports to effect the sale.
This means that the conditions should be clearly mentioned within the mortgage deed, but only then it will be considered as a mortgage. Otherwise, it can also be a normal sale. Unless we are not saying that this mortgage is being created within the mortgage deed, till then it will not be considered as a mortgage, as it can also be a normal conditional sale. So we will not call it mortgage by conditional sale.
3.Usufructuary Mortgage
Where the mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee. What type of interest is transferred by the owner here? He is giving the possession to the bank itself. What does it mean to give possession? Possession is either given immediately, or he is promising to give it in future. Expressly or by implication binds himself that I will give you possession in the future. So he is clearly mentioning it in the mortgage deed.
And authorizes him to retain such possession until payment of the mortgage money. Until he pays off the entire principal + interest mortgage money, till then the possession will remain with the bank. And to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest.
It can also collect rent here. The bank will take possession of the property as well as collect the rent in lieu of interest. So what we were talking about earlier interest and right to sell, basically the bank is collecting rent instead of right to sell. He can recover the principal and interest he has paid from the rent in that manner.
And it can also be mentioned in the mortgage deed. If bank recovers his entire payment, then he will transfer the ownership back i.e. will transfer the possession back to the owner. The transaction is called a usufructuary mortgage and a usufructuary mortgagee. So in this case we call the lender a usufructuary mortgagee.
4.English Mortgage
Where the mortgagor binds himself to repay the mortgage money on a certain date. Definitively the owner is promising that I will pay the mortgage money.
But he transfers the mortgaged property absolutely to the mortgagee. So what kind of interest is transferred here? Transferring total ownership. So basically the owner makes the bank or the lender the owner. After that, he takes money as much as he has to take a loan.
So what happens in this case, but subject to a provision that he will re-transfer it to the mortgagor upon payment. So here if the repayment is done to the lender, then it will transfer the ownership back to the owner, this property will be returned.
In this first ownership gets transferred to the bank, and later when the payment is completed, the bank transfers the ownership back. So whatever transaction happens in this, we call it English mortgage.
5.Mortgage by Deposit of Title Deeds (Equitable Mortgage)
We also call it equitable mortgage. This is most common in India. You must have seen whenever you take a loan in India, the bank keeps the documents of your property. That is what we call mortgage by deposit of title deeds or equitable mortgage.
Now see I told you about this equitable mortgage in India and second I told you registered mortgage. Right now here we talk about equitable mortgage according to the Transfer of Property Act. Where a person in any of the following towns, namely, the towns of Calcutta, Madras and Bombay, and in any other town which the state government may specify by notification in the Official Gazette.
Act of 1882
See when this Transfer of Property Act came, the Act of 1882 is very old, so at that time it was applied within 3 cities and in the cities which were notified by the State Government it gradually came to there too. But in today’s date if we talk about it then it is applicable in all cities.
So what happens here, basically delivers to a creditor or his agent documents of title to immovable property. What is the owner doing? This is the title deed of the property, whatever main property documents are there, they get deposited with the bank. To create a security thereon, the transaction is called a mortgage by deposit of title deeds.
So what can the bank do, if all the property documents will be with the bank itself then the bank can sell the property. The bank can’t sell directly, it’s a process, but loans recovery becomes easy here. That’s why it is most common in India, because there are not many legal hassles and practical hassles in it.
6.Anomalous Mortgage
This means that all the mortgages we talked about, if there is any mortgage mixed with them, then we call it anomalous mortgage. So if the mortgage is heavily customized within the deed, we can call it anomalous mortgage.
Recovery Process of Mortgage
Now let’s talk about recovery. There are 2 main sections for this. One is section 67 – Right to Foreclosure or Sale under Transfer of Property Act 1882.
In the absence of a contract to the contrary, the mortgagee has, at any time after the mortgages money has become due to him and before a decree has been made for the redemption of the mortgaged property, or the mortgages money has been paid or deposited.
A right to obtain from the court. See when this mortgage money is due, if no such order comes after that, and if the mortgage money is not paid or deposited, till then the bank has full right to approach the court and take orders. As per section 67. So if you don’t want to go to court, what are the provisions for that? Section 69 gives power of sale when valid.
Power to sell the mortgaged property
A mortgagee has power to sell the mortgaged property or any part thereof in default of payment of the mortgage money, without the intervention of the court. This can happen even without a court, but only when this power is given to the mortgagee within the mortgage deed.
So here the mortgage deed is very important. If by chance the owner is not able to pay his principal and interest and the mortgage deed clearly gives this right, then there is no need to go to the court. The bank can make its recovery by selling it directly.
But there is also a process for this. No such power shall be exercised unless and until notice in writing requiring payment of the principal money has been served on the mortgagor, and default has been made in payment for three months after such service.
So all these important clauses are related to mortgage and related to recovery. I’m sure you clearly understand what mortgage is exactly, how the bank recovery is done, and we have covered 6 types of mortgages.