Type of Mortgages in India

Definitions -

Sec. 58 of the Transfer of Property Act, 1882 defines mortgage as -

A mortgage is the transfer of an interest in specific immoveable 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.

Types of Mortgages -

1. Simple Mortgage
2. Mortgage by Conditional Sale
3. Usufructuary Mortgage
4. English Mortgage
5. Mortgage by deposit of title of deeds
6. Anomalous mortgage

1. Simple Mortgage -

In a Simple mortgage, the possession of the mortgaged property is not transferred from mortgagor to the
mortgagee.

If the mortgagor fails to repay the loan, the mortgagee has the right to sell the property and recover the
loan from the sale amount.

2. Mortgage by Conditional Sale -

Under such Mortgage, the mortgagor apparently sells the property to the mortgagee on certain conditions
-

1.On failure to repay the mortgage money before a certain date the sale shall become absolute,or
2.On condition that on such repayment of mortgage money the sale shall become invalid,or
3.On condition that on such repayment the mortgagee shall retransfer the property.

In such case, the mortgagee is a "mortgagee by conditional sale".

3. Usufructuary Mortgage -

In a usufructuary Mortgage, the possession of the mortgaged property is transferred to the mortgagee.
The mortgagee receives the income from the property (rent, profit, interest, etc) until the repayment of
the loan. The title deeds remain with the owner.

4. English Mortgage -

In an English Mortgage -

1.The mortgagor binds himself to repay the borrowed money on a certain date.
2.The mortgagor transfers the property absolutely to the mortgagee.
3.But such transfer is subject to the condition that the mortgagee will retransfer the property on
repayment before the agreed date.

5. Mortgage by deposit of title of deeds -

In such mortgage, the mortgagor delivers the title document of the property to the mortgagee with an
intention to create a security thereon. Such mortgage is valid in towns of Kolkatta, Mumbai and any other
town as the State Government may notify by publication in Official Gazatte

6. Anomalous mortgage -

Anomalous mortgage is a combination of different types of mortgages.

In the US, concept of Reverse Mortgage is fast catching up -

Meaning - A reverse mortgage loan is a loan where the lender pays the monthly installments to you
instead of you making any payments to the lender. Hence the name reverse mortgage, as the payment
stream is reversed. A Reverse mortgage enables senior citizens to convert their home equity into tax-free
income. Reverse mortgages enable eligible homeowners to access the money they have built up as equity
in their homes. They are primarily designed to strengthen seniors’ personal and financial independence
by providing funds without a monthly payment burden during their lifetime in their home.

11. DEFINITION AND NATURE OF MORTGAGE

According to Section 58 of the Transfer of Property Act, 1882, a mortgage is the transfer of an interest in
specific immoveable 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 agreement which may give
rise to pecuniary liability.
The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest the
payment of which is secured for the time being are called the mortgage money and the instrument by which
the transfer is effected is called the mortgage deed.
Essentials of a Mortgage

1. Transfer of Interest: The first thing to note is that a mortgage is a transfer of interest in the
specific immovable property. The mortgagor as an owner of the property possesses all the
interests in it, and when he mortgages the property to secure a loan, he only parts with a
part of the interest in that property in favour of the mortgagee. After mortgage, the interest
of the mortgagor is reduced by the interest which has been transferred to the mortgagee.
His ownership has become less for the time being by the interest which he has parted with
in favour of the mortgagee. If the mortgagor transfers this property, the transferee gets it
 subject to the right of the mortgagee to recover from it what is due to him i.e., the principal
plus interest.
2. Specific Immovable Property: The second point is that the property must be specifically
mentioned in the mortgage deed. Where, for instance, the mortgagor stated “all of my
property” in the mortgage deed, it was held by the Court that this was not a mortgage. The
reason why the immovable property must be distinctly and specifically mentioned in the
mortgage deed is that, in case the mortgagor fails to repay the loan the Court is in a position
to grant a decree for the sale of any particular property on a suit by the mortgagee.
3. To Secure the Payment of a Loan: Another characteristic of a mortgage is that the
transaction is for the purpose of securing the payment of a loan or the performance of an
obligation which may give rise to pecuniary liability. It may be for the purpose of obtaining
a loan, or if a loan has already been granted to secure the repayment of such loan. There
is thus a debt and the relationship between the mortgagor and the mortgagee is that of
debtor and creditor. When A borrows 100 bags of paddy from B on a mortgage and agrees
to return an equal quantity of paddy and a further quantity by way of interest, it is a
mortgage transaction for the performance of an obligation.

Where, however, a person borrows money and agrees with the creditor that till the debt is repaid he will not
alienate his property, the transaction does not amount to a mortgage. Here the person merely says that he
will not transfer his property till he has repaid the debt; he does not transfer any interest in the property to
the creditor. In a sale, as distinguished from a mortgage, all the interests or rights or ownership are
transferred to the purchaser. In a mortgage, as stated earlier, only part of the interest is transferred to the
mortgagee, some of them remains vested in the mortgagor.
To sum up, it may be stated that there are three outstanding characteristics of a mortgage:

a. The mortgagee’s interest in the property mortgaged terminates upon the performance of
the obligation secured by the mortgage.
b. The mortgagee has a right of foreclosure upon the mortgagor’s failure to perform.
c. The mortgagor has a right to redeem or regain the property on repayment of the debt or
performance of the obligation.

Kinds of Mortgages
There are in all six kinds of mortgages in immovable property, namely:

a. Simple mortgage.
b. Mortgage by conditional sale.
c. Usufructuary mortgage.
d. English mortgage.
e. Mortgage by deposit of title-deeds or equitable mortgage.
f. Anomalous mortgage.

Difference between Mortgage and Charge

1. A mortgage is created by the act of the parties whereas a charge may be created either
through the act of parties or by operation of law.
2. A charge created by operation of law does not require the registration as prescribed for
mortgage under the Transfer of Property Act. But a charge created by act of parties
requires registration.
3. A mortgage is for a fixed term whereas the charge may be in perpetuity.
4. A simple mortgage carries personal liability unless excluded by express contract. But in
case of charge, no personal liability is created. But where a charge is the result of a
contract, there may be a personal remedy.
5. A charge only gives a right to receive payment out of a particular property, a mortgage is
a transfer of an interest in specific immovable property.
 6. A mortgage is a transfer of an interest in a specific immovable property, but there is no
such transfer of interest in the case of a charge. Charge does not operate as transfer of an
interest in the property and a transferee of the property gets the property free from the
charge provided he purchases it for value without notice of the charge.
7. A mortgage is good against subsequent transferees, but a charge is good against
subsequent transferees with notice.

An Introduction to Mortgages

A mortgage is a loan taken to finance the purchase of a house or real

estate. This loan is usually obtained from banks, mortgage companies, or
other private sellers. The home and/or land is kept as collateral for the
loan, which means that the lender has a legal claim over it in case of
default of loan. In a mortgage agreement, the lender is known as the
mortgagee and the debtor or borrower, also as mortgagor. Sometimes, a
third party, like a mortgage broker (who helps find the best deals) or a
lawyer (to decide on legalities of the agreement) may also be involved.

Since the amount borrowed in case of mortgages are high, their

repayment periods are long- usually 15-30 years. The repayment period is
known as the term of the mortgage. By the end of this period, the
borrower has to completely return the principal amount borrowed
plus interest, by making periodical payments. This is called amortization.
The amount of interest paid is determined by the rate of interest that
the lender charges for letting you use his money.

Borrowers may also choose to pay back one mortgage completely before
the term ends, and take out another mortgage. This is to make use of
lower rates, accumulated value of the house etc. This is known as
refinancing.

Types of Mortgages
Mortgages are of many types. Some major categories have been discussed
below:

1)Fixed-rate mortgages (FRM): in which the rate of interest on the loan

remains fixed for the entire term of the loan. These are the most popular
kind of mortgages. The advantage with FRMs is that the periodic
payments are predictable and are not swayed by changing market rates.
Thus, it is easier for the borrower to make his budget. However, interest
rates for FRMs typically tend to be higher to cover the risk of a higher
market rate for the lender.

2)Adjustable-Rate Mortgages (ARM): in which the interest rate can move

up or down to match current market interest rates. The rate is adjusted
once every 1,3,5,7 etc years as agreed between the parties. The initial
rate in an ARM is slightly discounted than market rates. ARMs are
attractive to borrowers if market rates go down, resulting in lower
payments for the borrower. Also, with an ARM, you often qualify for a
higher loan amount. However, if the borrower is unable to predict the
trend in market rates properly, he may end up paying more than in an
FRM. An ARM is useful if the borrower plans to sell his house before
interest rates rise.

3)Interest-Only Mortgages (IOM): in which the borrower only pays

interest (plus property taxes and homeowners insurance) on the loan. The
borrower thus has to pay a lower monthly mortgage payment and might
also qualify for a higher loan amount. This type of mortgage is suitable
for borrowers expecting the value of their house to increase in the next
few years, after which the house will be sold. In that case, the borrower
realizes more equity on sale than the loan he has taken.
4)Balloon Loans: in which the loan is not amortized or only partially
amortized and the loan is repaid in one or a few large payments due at
longer periods. Sometimes, balloon loans have a conversion option, by
which the balloon loan can be converted to a new loan at the end of the
first payment. Though the absence of periodical payments is an attractive
option, borrowers face the risk of default if they are unable to make the
complete payment due to high interest rates at the end of the period.

5)Sub-prime mortgages: these are loans for borrowers with a credit

rating below 620. The low credit rating may be a result of past defaults
or delays in bill payments, loan repayments etc. Lenders charge a higher
rate of interest on such loans to account for the credit risk of borrowers.
The agreement usually also include pre-payment penalty (if the borrower
refinances with a lower rate loan) and balloon payments.

6)Jumbo mortgages: these are loans which let the borrower borrow more
than that set by government limits. Hence, these come under ‘non-
conforming’ loans. A higher interest rate is charged to compensate for
the lender’s higher risk.

7)Two-step mortgage: which combine the features of FRM and ARM.

Borrowers pay a fixed rate for an initial period, after which the rate is
adjusted, and the borrowers continue to pay the new fixed rate for the
remainder of the term. For example, a 5/25 loan thus has an initial foxed
period of 5 years, and then 25 years of payment at the revised rate. this
kind of mortgage provides good opportunity for borrowers who are
confident of improving their credit rating in few years.