Considered as one of the highest contributors to the banking and insurance industries, Mortgage forms an important source of financing real estate. Mortgages have made homeownership easy and affordable. This article provides an introduction to the concept of mortgages and the various types of mortgages while exploring in detail the essential elements or clauses of a mortgage deed.
According to Section 54 of the Indian Transfer of Property Act, a mortgage is the transfer of interest in a specific immovable property which may lead to a pecuniary liability for securing:
- Payment of money advanced or money which is to be advanced through a loan,
- An existing debt or a future debt, or
- The performance of a specific engagement.
Thus, a mortgage is nothing but a loan secured by real estate. The ownership of the property thereby transferred remains with the debtor or the Mortgagor. If the mortgagor is unable to repay the money advanced, the creditor or the Mortgagee can recover the same based on his interest in that property. The instrument by which such transfer is effected is known as the Mortgage Deed.
Sir Edward in the sixteenth century, introduced the concept of mortgage to solve the doubtfulness of whether the mortgagor will pay his debt. The term ‘mortgage’ is derived from the French term meaning ‘death pledge.’ If the mortgagor does not pay his debt forever, the property is dead to him upon condition. If the mortgagor does pay off his debt, then the pledged property or the mortgage is dead to the mortgagee.
In India, the mortgage industry is considered one of the highest contributors to the banking and insurance sectors. According to a Morgan Stanley Report, India’s property market sales are expected to grow at 18% during 2020-2025. This growth directly impacts the mortgage industry since most purchasers prefer purchasing real estate property through a mortgage loan.
Essential Elements of a Mortgage
- Transfer of Interest – There should be a transfer of interest in mortgaged property between the mortgagor and mortgagee to constitute a valid mortgage. The transfer of interest is only to secure the payment of money advanced.
- Specific Immovable Property – There must be a specific immovable property in the possession of the mortgagor which is distinctly specified.
- Consideration – The transfer is to be made to secure payment of a loan or for securing the performance of a particular contract. Hence, there should be sufficient consideration from both parties.
Types of Mortgages
- Simple Mortgage – In a Simple Mortgage, there is no personal delivery of property but the mortgagor undertakes to repay the amount in a specified period. The mortgagee does not have the right to liquidate the property without prior permission of the Court. He may either apply to the court for consent to take over the mortgaged property or file a suit for the recuperation of the sum due without offering the property.
- Mortgage by Conditional Sale – In this type of mortgage, the property is sold to the mortgagee with a condition to reinstate the property when the mortgagor repays the loan with interest. Thus, Mortgage by Conditional Sale is one in which there occurs an ostensible sale which shall be converted into an absolute sale when the mortgagor is unable to repay the loan.
- Usufructuary Mortgage – In the case of Usufructuary Mortgage, the mortgagor delivers the property unto the mortgagee. The mortgagee is entitled to receive rents and other profits accruing from the property as a settlement in lieu of the sum and interest due. The essentials of a Usufructuary Mortgage are as follows:
- No personal liability of the mortgagor
- The possession of the property is delivered to the mortgagee
- There is no fixed period for repayment
- The mortgagee is not authorised to sell the property
- The mortgagee is entitled to rents and profits earned from the mortgaged property
- English Mortgage – The mortgagor transfers the property to the mortgagee which shall be returned upon repayment of the sum due on a fixed date. Essentials of an English Mortgage are as follows:
- The mortgagor binds himself to repay the loan on a particular date
- The property mortgaged is completely transferred to the mortgagee
- The transfer is subject to the condition that the mortgagee will deliver the property to the mortgagor upon repayment of the sum due.
- Equitable Mortgage/ Mortgage by deposit of title deeds – In an Equitable Mortgage, the mortgagor declares to the mortgagee the documents of title to the immovable property as security for the loan advanced. The features of an Equitable Mortgage are:
- The documents of title deed are deposited as security
- The title deed is returned to the mortgagor upon payment of the sum due
- Anomalous Mortgage – A mortgage that does not confer to the characteristics of any of the above mentioned mortgages is termed an Anomalous Mortgage.
Elements of a Mortgage Deed
- Description of the deed – The description of the deed must be mentioned at the top of the deed. For example, “DEED OF MORTGAGE.”
- Parties to the deed – The names of both the mortgagor and the mortgagee must be mentioned in the mortgage deed. The mortgagor’s name is to be mentioned first and then that of the mortgagee. The person transferring the interest of property as collateral to the money advanced being the mortgagor and the person to whom such interest is transferred being the mortgagee. The parties so contracting must be competent to enter into a contract as stated in Section 10 of the Indian Contract Act.
- Details of the Mortgaged Property –This clause must contain the basic details regarding the mortgaged property. Detailed description regarding the value, location, and other relevant facts are disclosed in the Schedule to the Property which is generally attached to the mortgage deed.
- Recital – The recital forms the preamble of the mortgage deed disclosing the primary characteristics of the agreement. It details a short history of the property right until it reached the transferor and the reasons for the particular transaction.
- Habendum – This clause stipulates the quality and extent of interest to be exercised by the mortgagee over the mortgaged property. This clause defines and places restrictions on the rights of the mortgagee to the property. It generally begins with the words, “to have and to hold.”
- Covenant for Repayment – This clause provides for the modes and conditions of repayment. It specifies the consideration and the period within which the payment is to be completed. It also provides for conditions when the mortgagor is unable to pay within the specified period.
- Mortgage Clause – The Mortgage Clause forms the most important clause in the agreement as it determines the type of mortgage entered into by the parties. This determines the rights and duties of both the mortgagee and the mortgagor.
- Possession – This clause determines whether the mortgagor or the mortgagee shall exercise possession over the mortgaged property. The possession is dependent on the type of mortgage:
- Simple Mortgage –The possession of the mortgaged property is not delivered to the lender.
- Usufructuary Mortgage – The possession of the mortgaged property is delivered by the mortgagor to the mortgagee.
- Title Deeds – This clause states the documents or title deeds that are to be transferred to the mortgagee. Example of title deeds/documents includes, Allotment Letter, Lease deed, conveyance deed, sale deed, will, etc.
- Insolvency – This clause specifies how the mortgaged property is to be treated in case of insolvency of the mortgagor.
- Required Documents – This clause mentions all the documents which are necessary for effectuating the mortgage deed. Example; PAN card, ID proof, Property Documents, etc.
- Redemption Clause – This clause details a statutory right granted to the mortgagor under Section 60 of the Transfer of Property Act. It specifies the tenure of the deed, how the property shall be reinstated to the mortgagor.
- Execution and Attestation – Attestation of the deed is mandatory to make the deed valid and enforceable. The deed must be registered, stamped, and signed by at least two witnesses.
- Acceleration and Prepayment Clause – These clauses are incorporated in a mortgage deed at the discretion of the parties. The acceleration clause enables the mortgagor to pay off the amount due immediately upon the happening of a certain event. The prepayment clause permits the mortgagor to repay the debt before the due date along with a charge. This charge serves to compensate the mortgagee for interest and other charges otherwise lost.
Due to the easy and less expensive procedure involved in the creation of a mortgage, it is often resorted to by banks and other financial institutions as security or collateral for home loans and other advances made. A mortgage makes homeownership affordable by spreading the repayment over several years. It is a cost-effective manner of borrowing with low-interest rates compared to other forms of borrowing. However, despite its precautionary measures, several instances of mortgage fraud have been reported in India and abroad.Mortgage fraud may include material misstatement, omission, or misrepresentation of information relating to the property. 3 Indians in New York were sentenced for $9.3mn in 2018 owing to a mortgage fraud scheme.
To prevent future occurrences of such frauds, one must understand the basic components of a mortgage deed and the common causes of such frauds.
Transfer of Property Act, S.54.
Transfer of Property Act, S.58(b).
Transfer of Property Act, S.58(c).
Transfer of Property Act, S.58(d).
Transfer of Property Act, S.58(e).
Transfer of Property Act, S.58(f).
Transfer of Property Act, S.58(g).
Indian Contracts Act, S.10.
Transfer of Property Act, S. 6(h)(i).
Dip Narain Singh v. Nageshar Prasad and Ors, AIR 1930 All 1.