What Are Registered And Equitable Mortgages?
When the word “mortgage” is used in the context of a home loan, we know that the property has to be mortgaged to the lender until the loan is fully repaid. Mortgage refers to the transfer of interest in a property in order to borrow money.
As a home loan buyer, it is important to recognise the need for 'Registered' and 'Equitable' mortgages, and the stamp duty charges involved in the legal process. Such charges do have an impact on your cost of credit. Even when the bank offers a substantially low lending rate and waives the loan-processing fee, such charges can weaken the benefits.
MakaanIQ tells you more about registered and equitable mortgage in home loans.
Understanding equitable mortgage
In an equitable mortgage, the owner has to transfer his title deed to the lender, thereby creating a charge on the property. The owner also orally confirms the intent of creating a charge on the property. An equitable mortgage is also known as an implied or constructive mortgage. No legal procedure is involved in an equitable mortgage, but it is considered mortgage in the interest of justice (under equity). The borrower obtains money from the bank/lender with an agreement that his property, on which the equitable mortgage is created, will act as security for the loan.
The borrower has to submit his title deed to the lender as security for the money borrowed.
No formal, legal document is executed or registered in the records of the registrar, but it can be created at notified places. Stamp duty and charges are comparatively low, relative to a registered mortgage.
Understanding registered mortgage
In a registered mortgage, the borrower has to create a charge on the property with the sub-registrar through a formal, written process, as a proof of transfer of interest to the lender as security for the loan. Registered mortgage is also known as 'Deed of Trust'.
A registered mortgage meets all the necessary legal requirements to create a mortgage or a charge. If the borrower repays the loan according to the terms and conditions of the home loan agreement, the title of the property is given back to the borrower. The rights of the lender (as created during the legal process) will stand null and void on the property. However, if the borrower fails to fully repay the loan (i.e. interest plus the principal component), the lender will have the right to take possession of the property.
Upsides of equitable mortgage
An equitable mortgage is considered easy and economical. The stamp duty involved in an equitable mortgage is much lower than what is paid in registered mortgage. In many states, stamp duty and registration charges in equitable mortgages are as low as 0.1 per cent of the loan amount. In other mortgages, stamp duty and registration charges have to be paid twice, at times. This means that stamp duty and registration charges are paid when the mortgage/charge is created, and again when the mortgage is closed, i.e. when the loan amount is fully repaid.
The borrower and the bank representative do not have to visit the sub-registrar's office and undergo the process of registration/ release of the mortgage.
The original title deed is returned to you without any formal process when you completely repay your debt to the bank.
Why banks prefer registered mortgage
Despite the benefits that equitable mortgage has to offer both parties (i.e. borrower and the lender), banks prefer registered mortgage because equitable mortgages lack records of the loan on the property in the sub-registrar's office. In an equitable mortgage, only the lender and the borrower are aware of the mortgage/charge created on the property/land. This leaves the possibility of the property being sold to a third party without fully repaying the loan. The new buyer/ party might not be aware of the mortgage (because there are no records, and the mortgage is created by a mere exchange of words).
So, banking institutions consider equitable mortgage as misleading. Many instances of fraud were reported in the past by lenders because the same property was used to get multiple loans as public records were lacking.