Different Types of Mortgages for Bank Loan

There are six types of mortgages recognized by the transfer of property act. They are

Types of Mortgages

1. Simple Mortgage
2. Mortgage by Conditional sale
3. English Mortgage
4. Usufructuary Mortgage
5. Equitable Mortgage or Mortgage by deposit of title deeds
6. Anomalous Mortgage.

Simple Mortgage

In a simple mortgage, the mortgagor binds himself personally to pay the mortgage amount without delivering possession of the mortgaged property.

The mortgagor, however, agrees expressly, or impliedly, that in the event of his failure to pay the mortgage debt, the mortgagee shall have a right to cause the mortgaged property to be sold and, the proceeds of the sale to be applied towards the discharge of the mortgage debt to the extent necessary.

Thus, in a simple mortgage, the mortgagee has two-fold security for the debt-

1. The personal obligation of the mortgagor;
2. Property

The words “cause the mortgaged property to be sold” mean that the mortgagee shall have to seek the intervention of the court for selling the mortgaged property.

The mortgagee cannot directly sell the property. As the possession of the property remains with the mortgagor, such a mortgage is called non-possessory.

The mortgagor takes upon himself a personal obligation to repay the amount failing which the mortgagee gets two options:   

1. To apply to the Court for permission to sell the mortgaged property, or
2. To file a suit for recovery of the whole amount without selling the property.

Banks do not prefer to make an advance against this type of mortgage because of a number of obligations on banks that are difficult to discharge.

Mortgage by Conditional Sale (Types of Mortgages)

In this type of mortgage, the mortgagor ostensibly sells the mortgaged property to the mortgagee under any one of the following conditions:

1. That on default of payment of the mortgage money on a certain date, the sale shall become absolute, or
2. That on such payment being made, the sale  shall become void, or
3. That on such payment being made, the mortgagee shall transfer the mortgaged property to the mortgagor.

The following are the essential characteristics of such of mortgage:

• It is an ostensible sale and not a real sale.
• The ostensible sale is subject to a condition that if the mortgage money is not paid on the due date the ostensible sale will become into real sale upon the mortgagee applying to the court and getting a decree in his favor, since the right to redeem is then lost or in case the mortgagor makes the payment, the mortgagee will retransfer the property to the mortgagor.

4. The possession of the property continues with the mortgagor.

5. The fact that the transaction is a mortgage should be specified in the document of sale.

6. The mortgagor does not have a personal liability; therefore, in the case of the mortgagee’s claim, he cannot recover the balance out of any other property of the mortgage.

This type of mortgage is not usually taken by the bankers as there is no personal covenant for repayment of debt.

English Mortgage (Types of Mortgages)

According to the transfer of property Act, an English mortgage is a transaction in which “the mortgagor binds himself to repay the mortgage money on a certain date and transfers the mortgaged property absolutely the mortgagee, subject to the provision that the mortgagee will re-transfer it to the mortgagor upon payment of the mortgaged money as agreed.”

Essential Features

1. It provides for a personal promise to repay the mortgage money on a specified date;
2. The property mortgaged is transferred to the mortgagee absolutely. The mortgagee, therefore, is entitled to take immediate possession of the property. He may, under certain circumstances, sell the mortgaged property without the intervention of the court.
3. Such an absolute transfer of the property is subject to the provision that the property shall be reconveyed to the mortgagor in the event of the repayment of the mortgage money.

The distinction between English Mortgage and Mortgage by Way of Conditional Sale

An English law differs from the mortgage by conditional sale in two respects, viz.,

1. In an English mortgage, there is an undertaking or some personal liability by the mortgagor to pay the debt and the property should be conveyed absolutely to the mortgagee, subject to the condition of re-transfer on payment of mortgage money on a certain date. But in a mortgage by conditional sale, there is no personal liability to pay; the sale is ostensible and is to be perfected into an absolute sale on a failure of the payment of mortgage money on a certain date.
2. In an English mortgage, the ownership is wholly transferred to the creditor which is, however, liable to be taken back on payment of the loan on a certain date. In a conditional mortgage, the creditor acquires qualified ownership which can ripen into an absolute one on a failure of the mortgagor to repay. So the mortgage under the English mortgage has the right to enter into immediate possession of the property, while a conditional mortgage has necessarily no such right.

Usufructuary Mortgage (Types of Mortgages)

In this mortgage, the possession of the property is delivered to the mortgagee who is entitled to recover the rents and profits of the property and appropriates the same to the principal and interest sum due.

The mortgagor is not personally liable to pay the debt and cannot be sued. The mortgagee is to remain in possession of the property till the mortgage money together with interest is paid. Therefore, as a usufructuary mortgagee, he cannot sue either for sale or foreclosure.

The chief characteristic of a usufructuary mortgage is the transfer of possession of the mortgaged property to the mortgagee, who is entitled to receive income accruing from there and to appropriate the same towards the payment of the mortgage money and/or interest thereon.

The liability of the mortgagor is thus gradually reduced. No one can say when the mortgagee will fully recover the mortgage money through this process. Banks hardly entertain the advance proposal of this type.

Equitable Mortgage or Mortgage by Deposit of Title Deeds

Where a debtor delivers to the creditor or his agent documents of title to the immovable property with interest to create a security thereon, the transaction is called a mortgage by deposit of title deeds.

It is also known as an equitable mortgage. Under this mortgage, the rights of ownership, or of possession. And of the absolute power of disposal is not transferred to the mortgagee; only an equitable interest in the property is passed on to the mortgagee as security for the debt.

But what is proactive happens is that the lender obtains a form of a legal mortgage executed in his favor, but does not get it registered and merely gives notice to the Registrar of the deposit of title documents.

Subsequently, should the lender find it necessary to enforce the security, he can move the court to convert the equitable mortgage into a legal mortgage and get it registered on payment of the prescribed registration fees. Thus, the following are the principal factors of such a mortgage:

1. There must be the delivery of the title deeds to the creditor;
2. There must be an intention in writing to make the title deeds as security for the loan, and
3. The mortgage must be created in cities and other towns and urban areas specified by notification in the official gazette by the Government.

The principal advantage of the equitable mortgage is that it can be affected secretly and the credit of the borrower is not affected/lost in the market because of raising the funds against the immovable property.

This method facilitates quick loans in urgent cases. This type of mortgage is popular equally with bankers and borrowers.

Anomalous Mortgage (Types of Mortgages)

A mortgage that does not come within any of the above classes is called an anomalous mortgage a mortgage containing a mixture of the characteristics of the different types mentioned above comes within the category of the anomalous mortgage.

It means that if the terms and conditions agreed to between the mortgagor and the mortgagee do not strictly conform to those specified under Section 58 for the above type of mortgages and there is even a slight variation from the same, the mortgage falls in the category of an anomalous mortgage. It may, therefore, take various forms depending upon customs, local usage, or contract.

There are two kinds of anomalous mortgages that are often noticed in practice. They are, firstly, a simple-cum-usufructuary mortgage and secondly, a usufructuary mortgage accompanied by conditional sale.

Such mortgages are not generally accepted by banks as security for the advance.

On the basis of the transfer of title in the mortgaged property, mortgages can be classified into two categories:

1. Legal mortgage
2. Equitable mortgage

Legal Mortgage

In a legal mortgage, the mortgagor transfers his legal title in respect of the mortgaged property to the mortgagee by a deed. The mortgagee gets what is called a Legal Estate in the property and he is endowed with all sorts of rights and remedies which can, for the most part, be exercised on his initiative and there is no need to seek the cooperation of a mortgagor. A legal mortgage is a perfect form of security.

The transfer of title is affected only by a registered deed with the office of the Sub-Registrar. When the mortgage debt is paid off the title to the property is re-transferred to the mortgagor.

In a legal mortgage transfer, the legal right to the mortgagee involves expenses in the form of stamp duty and registration charges.

Procedure for legal mortgage

1. An instrument mortgaging the property is executed. It is signed by the mortgagor and two witnesses;
2. If the principal money secured is Tk. 100 or more, the instrument must be registered;
3. The mortgage is complete as soon as the deed is registered but it will be effective from the date of execution.

In case the instrument is not duly attested and registered where it is son required, the mortgage will be void. However, he may use the instrument to establish a personal covenant to pay.

Equitable Mortgage

this is another type of mortgage for bank loans. An equitable mortgage is created by an agreement, express or implied, that an equitable interest in the property shall pass on to the mortgagee as security for a debt due or to become due. An equitable mortgage is created by a simple deposit of original title deeds with an intention to create a security thereon for the debt.

The legal title to the property is not passed on to the mortgagee but the mortgagor undertakes through a memorandum of deposit, to execute a legal mortgage in case he fails to pay the debt in time. It is the easiest and most economical and needs no registration.

Equitable mortgages are valid only if title deeds are deposited with the bank’s branch situated in the towns which have been notified of the Transfer of Property Act or in the official gazette by the Government.

The restriction to the notified towns refers to the place where title deeds should be deposited and the loan is also raised but the following situation is also covered:

Where title deeds are deposited in a notified town and a loan is also raised in the notified town but at the request of the borrower, the loan account is subsequently transferred to other stations not notified.

In such a case, the title deeds, however, must be retained in the notified town and the suit for recovery of mortgage money, if necessary, must be filed in the notified town where the title deeds, were deposited originally.

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