What is Mortgage?
Meaning of Mortgage: – A mortgage is a loan that the borrower uses to purchase or maintain a home or other form of real estate and agrees to pay back over time, typically in a series of regular payments. The property serves as collateral to secure the loan. A mortgage is the transfer of an interest in specific immovable property to secure the payment of funds or to be advanced through a loan, an existing or future loan, or the performance of an engagement that may give rise to a pecuniary liability.
According to Section 58(a) of The Transfer of Property Act, 1882 mortgage is the transfer of an interest in specific immovable 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 engagement which may give rise to a pecuniary liability. The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being are called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage-deed.
What are the characteristics of mortgage?
Following are the characteristics of mortgage: –
- A mortgage can only be affected on immovable property;
- immovable property includes land and profits that arise from things attached to the earth such as trees, buildings and machinery.
- But a machine that is not permanently fixed to the earth and is able to shift from one place to another is not considered immovable property.
- A mortgage is the transfer of interest in a specific immovable property which is different from sale. As in sale the ownership right of the property is transferred but in mortgage certain right of ownership get transferred and the other ownership right will be with the owner only.
- The purpose of the transfer of an interest in property would be to secure a loan, resulting in a monetary obligation. Transfer of property for the purpose other than the above will not amount to mortgage. For example: – property transferred to liquidate prior debts will not become mortgage.
- The mortgaged property must be a specific one, i.e., that can be identified by its size, location, boundaries, etc.
- The actual possession of the mortgaged property should not always be transferred to the mortgagee.
- The owner of the property will get the interest back in the mortgaged property after the repayment of the debt.
- If the mortgagor fails to repay the loan, the mortgagee receives the right to recover the debt from the sale proceeds of the mortgaged property.
Who is a Mortgagor?
Meaning of Mortgagor: – A mortgagor is the person who borrows money from a lender in order to purchase a home or other piece of real estate. The person who has transferred interest to a specific immovable property is known as a mortgagor. A mortgagor is the person or other entity that receives a mortgage loan in order to buy property.
Mortgagors can obtain varying mortgage loan terms based on underwriting factors associated with a mortgage loan. Mortgage loans are a type of secured loan therefore one commonality among all mortgage loans is the pledging of real estate collateral.
Once the loan has been funded, the mortgagor is responsible for making timely payments of interest and principal. If they do not, they may ultimately be subject to foreclosure on the home.
For example: – ‘A’ wants a loan from ‘B’. Now ‘B’ wants his money to be secured which he is giving in loan to ‘A’. ‘A’ will transfer interest in the specific immovable property to ‘B’ and give him the right to sell the property in case ‘A’ is not able to repay the amount. ‘A’ is the mortgagor here.
Who is a Mortgagee?
Meaning of Mortgagor: – A mortgagee is a lender, specifically, an entity that lends money to a borrower for the purpose of purchasing real estate. In a mortgage transaction, the lender serves as the mortgagee and the borrower is known as the mortgagor. The transferee or the person in whose favor the interest is being transferred is known as a mortgagee. In the example given above, the person who is lending money i.e. B is a mortgagee.
In order to limit its risk, a mortgagee creates a priority legal interest in the value of the mortgaged property, allowing it to seize it if the mortgagor defaults on the loan.
How a Mortgagee Works?
Most people take out a mortgage to finance the purchase of a residence or commercial building. In order to limit its risk in the investment, the lender in the transaction creates a priority legal interest in the value of the property, substantially lowering the probability, the mortgagee, will not be repaid in full if the borrower defaults on the loan. This is done through a perfected lien and title ownership.
A mortgagee represents the interests of the lending financial institution in a mortgage deal. Lending institutions can offer a variety of products to borrowers, representing a significant portion of loan assets for both individual lenders and the credit market overall.
What is Mortgage money?
Meaning of mortgage money: – The principal amount which is given as loan and the interest amount that the mortgagor will pay. The sum of both, the principal amount and interest is known as mortgage-money.
In a mortgage loan the mortgagor is the party receiving the loan and the mortgagee is the party offering the loan. The mortgagor must submit a credit application and agree to the mortgage loan terms if approved for a loan. The mortgagee has the authority to determine the terms of the mortgage loan, oversee the servicing of the loan and manage the title rights to the real estate collateral.
Mortgage Loan Contract Obligations
Mortgagors approved for a mortgage loan must agree to the terms offered by the mortgagee in order to complete the deal. A mortgage loan contract will include the mortgagor’s interest rate and duration. The mortgagor is required to make monthly payments of principal and interest in order to keep the loan in good standing with the mortgagee. Mortgage loan contracts also include provisions for title ownership and a lien on the real estate property as collateral. Provisions pertaining to the collateral outline the requirements for maintaining monthly payments and the specifications regarding any missed payments. Terms can vary regarding the number of delinquent payments allowed and when the lender can take action with the lien to seize the property in default.
What is a Mortgage Deed?
Meaning of Mortgage Deed: – This is the means by which the transfer of interest in a specific immovable property is affected. It is a type of agreement that legally binds both the mortgagor and the mortgagee. A mortgage deed is a document that contains all details concerning the loan given including the parties involved, details of the property kept as collateral, loan amount, interest rate, and more. The deed gives a thorough run-through with regards to the interest and title over the property.
There are 6 types of mortgages in India
- Simple Mortgage [Section 58(b)]: – In simple mortgage the borrower personally mortgages the immovable property to avail the debt. The lender has the right to sell the mortgaged property in case of repayment failure. In such type of mortgage, the borrower needs to sign an agreement stating that if he/she is unable to pay back the borrowed amount in specified time duration, then the lender can sell the property to anyone to get his money back.
- The fundamental element of a simple mortgage is the personal obligation to pay on the part of the mortgagor.
- Possession remains with the mortgagor in the case of a simple mortgage. The security which is obtained by the mortgagee is of the mortgaged property, not of the rents and profits accruing from it.
- The mortgagee is empowered to sell the property in the case of non-payment of the mortgaged money.
- Mortgage by Conditional Sale [Section 58(c)]: – In mortgage by conditional sale, there is a condition that on the failure of the repayment of the mortagage money the mortagagee has the right to sell the mortagaged property, but if mortagagor repays his debt then this condition will become void. Under such mortgage, the lender can put a certain number of conditions which the borrower must follow in terms of repayment. These conditions may include the sale of the property if there is a delay in the monthly instalments, an increase in the rate of interest due to delay in repayment, etc.
- Usufructuary Mortgage [Section 58(d)]: – In Usufructuary Mortgage, the property is transferred to the mortagagee, who can get rent or profit from it without creating any personal liability on the mortagagor in case of repayment failure. This kind of mortgage gives a benefit to the lender. The lender has the right over the property for the due course of the loan period, he can put the property on rent or use it for other purposes until the repayment of the amount. But the main rights lie with the owner himself.
- The possession of the mortgaged property is delivered to the mortgagee by the mortgagor as a security for the payment of mortgage money. The mortgagee is entitled to retain the ownership of the property till the debt remains unsatisfied.
- The mortgagee is entitled to receive rent and profits accruing from the mortgaged property till the money is repaid.
- The mortgagor does not take any personal responsibility for the payment of mortgage money in the case of a usufructuary mortgage.
- English Mortgage [Section 58(e)]: – In English Mortgage, the mortagagor binds himself as he specifies a certain date for the repayment of money, and after the repayment of the debt to the mortagagee, the mortagagor will get his property back. In this type of mortgage, the borrower has to transfer the property in the name of the lender at the time of taking money, at a condition that the property would be transferred back to the borrower once the complete amount is paid back.
- In an English mortgage, there is a personal liability of the mortgagor to repay the amount of mortgage debt on a certain date as agreed. An agreement to pay is an important part of such a mortgage.
- In case of default by the mortgagor, the remedy available with the mortgagee is to sell off the mortgaged property and recover himself.
- The mortgagee in this form of mortgage gets the right of possession whether the right of entry is expressed or not, and can retain the same till the said amount is not paid to him.
- Mortgage by Deposit of Title Deed [Section 58(f)]: – The mortgagor deposits the title deed of the property to the mortagagee with the mortagaged property against the debt to avail. 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 concerned may, by notification in the Official Gazette, specify in this behalf, delivers to a creditor or his agent documents of title to immovable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title-deeds. In this type of mortgage, the title deeds of the property are given to the lender. This is a common phenomenon in the banking mortgage loans. It is done to secure the property.
- In English Law, this type of mortgage is called an ‘equitable mortgage’ as opposed to a ‘legal mortgage’ because there is just a deposit of a document of the title without writing or without any other additional formalities.
- It is not necessary to make physical delivery of documents, a constructive delivery of documents is sufficient. A valid equitable mortgage does not require all the documents of title to be deposited or the documents deposited to show a complete title.
- Anomalous Mortgage [Section 58(g)]: – A mortgage that does not fall under any of the above types of mortgage is a divisional mortgage. A mortgage that is not a simple mortgage, a mortgage by conditional sale, a usufructuary mortgage, an English mortgage, or a mortgage by deposit of title deeds within the meaning of this section is called an anomalous mortgage. Such agreement which is made between the mortgagor and the mortgagee according to their terms and conditions is called an anomalous mortgage. Where it is not a simple, usufructuary, mortgage by conditional sale, etc. is termed as an anomalous mortgage.
- In the case of an anomalous mortgage the rights and liabilities of the parties shall be determined by their contract as evidenced in the mortgage deed, and, so far as such contract does not extend, by local usage.
- Such agreement which is made between the mortgagor and the mortgagee according to their terms and conditions is called an anomalous mortgage.
When do mortgagor’s rights and liabilities arise?
The rights and liabilities of a mortgagor arise during a mortgage. A loan can be secured or unsecured. Where the debt is paid on the basis of the debtor’s promise to pay (for example- note the promise), such loans are called unsecured loans. But, where the creditor seeks security from the debtor for repayment of his money, the loan is known as secured loan. One such way to secure debt is mortgage.
Section 58 (A) of the Transfer of Property Act, 1882, defined mortgage as the transfer of interest in a specific immovable property for securing: –
- The money given to him should be paid or given through loan, or
- A current or future debt, or
- Performing an engagement that can lead to an pecuniary liability.
What are the rights of mortgagor?
Every mortgage-deed leaves a right to the mortgagor and has an equal liability for mortgagee and vice versa.
The following are the rights given to a mortgagor granted by the Transfer of Property Act, 1882: –
- Right to Redemption
- Right to Transfer Mortgaged Property to a Third Party instead of Returning Back to Mortgagor
- Right of Inspection and Production of Documents
- Right to Accession
- Right to Improvements
- Right to a Renewed Lease
- Right to Grant a Lease
Explanation:
- Right to Redemption (Section 60): – It is one of the most important rights of a mortgagor granted under the section of the Act. This right ends when the mortagagor get his mortagaged property back. The right to redeem further grants three more rights to the mortgagor: –
- Right to terminate the mortgage deal
- Right to transfer mortgaged property in their name
- To withdraw possession of property in case of delivery of possession
There are three exceptions to the right to redeem. It can be extinguished under the following matters: –
- By acts of parties
- By operation of law
- By decree passed by court
- Obligation to transfer it to third party instead of pledging [Section 60 (A)]: – This right was added to the Act by the Amendment Act of 1929. This right provides the mortgagor with the right to assign the mortgage loan to the mortgagee and to transfer the property to a third person as directed by him. The purpose of this right is to help the mortgagor to pay off the mortgagee by taking debt from a third person on the same security.
- Right to inspection and production of documents [Section 60 (B)]: – This section is also inserted by the Amendment Act of 1929. It is the right of the mortgagor to ask the mortgagee to produce copies of the documents of the mortgaged property in his possession for inspection on notice at a reasonable time. Expenses incurred on the production of a mortgage or copies of documents or travel expenses are to be paid by the mortgagor. This right is available to the mortgagor only as long as the right of redemption exists.
- Right to Accession (Section-63): – Basically, accession means any addition to the property. According to this right, mortgagor is entitled to such accession of his property which is in the custody of the mortgagee. There are two types of accession: –
- Artificial accession: – This is when the mortgagor made some efforts and this increased the value of land.
- Natural accession: – The name itself defines i.e. without any man-made efforts.
- Right to Improvements [Section 63 (A)]: – According to this right, if the property mortgaged is improved while it is in the possession of the mortgagee, then mortagagee is entitled to such correction on redemption and in the absence of any contract to the contrary. The mortgagor is not liable to pay unless the mortgagee is: –
- The improvements made by the mortgagee were to protect the property or with the prior permission of Mortgagor.
- Improvements can be made by the mortgagee with the permission of the public authority.
- Right to Renewed Lease (Section 64): – Where the mortgaged property is a lease, and the mortgagee obtains a renewal of the lease, the mortgagor, upon redemption, shall, in the absence of a contract by him to the contrary, have the benefit of the new lease.
- Right to Grant a Lease [Section 65 (A)]: – This right was introduced by the Amendment Act of 1929. Prior to this right, the Transfer of Property Act did not permit a mortgagor to lease property mortgaged on his own, but only with the permission of the mortgagee. Now, a mortgagor has the right to lease the mortgaged property while in lawful possession of the property subject to the following conditions: –
- All conditions in the lease must be in accordance with local laws and customs to prevent any fraudulent transactions.
- No rent or premium shall be paid by the mortgagor in advance or promised by him.
- There will be no provision for renewal of the lease in the contract.
- Every such lease shall come into force within a period of six months from the date of its execution.
- Where the mortgaged property is a building, the lease period should not exceed three years in total.
What are the liabilities of a mortgagor?
With the rights granted to a mortgagor, the Transfer of Property Act has also conferred certain duties on him.
The duties of a mortgagor are as follows: –
- Duty to Avoid Waste
- Duty to Indemnify for Defective Title
- Duty to Compensate Mortgagee
- Duty to Direct a Rent of a Lease to Mortgagee
Explanation:
- Duty to Avoid Waste (Section 66): – This section imposes a duty on the mortgagor for not committing any act which leads to the wastage of property or reduces the value of the mortgaged property. Waste is divided into two categories: –
- Permissive waste: – A mortgagor who is in possession of the property mortgaged is not liable to the mortgagee for any minor waste.
- Active Waste: – When an act is done that causes major waste of property or leads to a decrease in the value of the mortgaged property, the mortgagor will be liable to the mortgagee.
- Duty to Indemnify for Defective Title: – It is the duty of a mortgagor to compensate the mortgagee for defective title in the mortgaged property. A defective title refers to the situation when a third one starts making claims or interferes in the mortgaged property. It is the liability of the mortgagor to compensate for the expenses incurred by the mortgagee to protect the title of the property.
- Duty to Compensate Mortgagee: – If the mortgaged property is in the possession of the mortgagee who is paying all taxes and other public charges, it is the duty of the mortgagor to compensate the mortgagee for such expenses. Similarly, when no delivery of possession is there i.e. the property mortgaged is still in possession of the mortgagor, it is his duty to pay all public charges and taxes levied thereon.
- Duty to Direct Rent of a Lease to Mortgagee: – Where the mortgaged property is leased by the mortgagor, it is his duty to direct the lessee to pay the rent to the mortgagee.
What are the rights of mortgagee?
Important rights of Mortgagee as follows: –
- Selling Rights: – Mortgagee has the right to sell the mortagaged property, if mortagagor fails to return the loan in time.
- Shortage of Money Case: – After selling the property, if the amount which is received from the sold property is less than the loan. The remaining balance can be recovered from the person by getting the decree from the court.
- Usufructuary Case: – In this case the mortgagee has no right to sell the property and to obtain a decree from the court. The banker may retain possession of the property until the recovery of the loan.
- Refusal of Debt: – If a mortagagor refuses to repay the loan or is unable to repay the loan, the mortagagee can obtain a foreclosure decree from the court.
- Adjustment of Payment: – The banker has the right to distribute the received payment after the sale of the property as principal amount, interest and other charges.
- Joint Suit: – If the mortgagor is more than one person, a lawsuit will be filed against all of them if the loan is not refunded.
- Sale of Private Property: – In case of personal property, before selling the property the mortgagee shall issue at least 3 months notice to the mortgagor.
What are the liabilities of the mortgagee?
When the property is in the possession of the mortgagee, he has the following duties or obligations: –
- He cannot cause any damage to the property.
- No changes can be done in the property.
- Property should be insured.
- Property should be protected.
- Rent of the property should be collected.
- Government revenue will have to be paid.
- Property should be kept clear of all dues.
Case laws
- Noakes & Co. vs. Rice (1902) AC 24
Facts of the Case: – Rice was a dealer who mortgaged his property, premise and goodwill to N subject to the provision that if R returned the entire amount, the property would be transferred back to his name or another person. A covenant was attached stating that whether the amount was due, R would only sell malt liquor by N in his premises. Because of this covenant, R had difficulty in redemption and did not give him full authority over his property.
Judgment of the Case: – In this case court held that anything that clogs this right is bad and they have come up with the concept that ‘once a mortgage is always a mortgage’ and that the mortgage can never be irrevocable.
- Stanley vs. Wilde, (1899) 2 Ch 474
Judgment of the Case: – In this case court held that any provision mentioned in the mortgage deed which has the effect of preventing or obstructing the right to redeem is void as a restriction on redemption