What is a Mortgage Deed?
When you hear about borrowing money using property as security, you might come across terms like “mortgage deed” and “mortgage deed act. We’ll explore what a mortgage deed is, the legal framework governing it, and why it matters.
Understanding a Mortgage Deed
A mortgage deed is a legal document that establishes the security interest of a lender in the borrower’s property. This means that the property is pledged as collateral for a loan. If the borrower fails to repay the loan, the lender has the right to take possession of the property to recover the outstanding debt.
Importance of a Mortgage Deed
A mortgage deed serves several important purposes for both the borrower and the lender:
- Security for Lender: By pledging the borrower’s assets as collateral, the mortgage deed offers security to the lender.
- Legal Documentation: The mortgage deed serves as a legal record of the agreement between the borrower and the lender.
- Clear Terms: The deed clearly outlines the terms and conditions of the loan, including the repayment schedule and interest rate. This guarantees that each party is conscious of their responsibilities.
- Protection for the Borrower: By formalizing the loan agreement, the mortgage deed provides legal protection for the borrower, ensuring that the lender cannot arbitrarily change the terms of the loan.
How a Mortgage Deed Works
Creating a mortgage deed involves several steps to ensure it is legally valid and binding:
- Loan Agreement: The borrower and the lender have an understanding regarding the terms of repayment, interest rate, and loan amount, among other things.
- Drafting the Mortgage Deed: The mortgage deed is drafted to include details of the mortgagor and mortgagee, a description of the property, and the terms of the loan.
- Stamp Duty: The mortgage deed must be executed on stamp paper of the required value, which varies depending on the jurisdiction and the value of the property.
- Registration: The mortgage deed must be registered with the local sub-registrar office. Both the mortgagor and the mortgagee, along with two witnesses, must be present for the registration process. The registration involves submitting the deed along with necessary documents and paying the registration fee.
- Repayment: The borrower repays the loan according to the terms specified in the mortgage deed. The mortgage ends when the debt is paid in full, and the lender no longer has any claim on the property.
Types of Mortgages:
- Simple Mortgage: The borrower pledges the property as security and agrees to repay the loan without transferring the property’s possession to the lender.
- Mortgage by Conditional Sale: The property is transferred to the lender on the condition that the transfer becomes absolute if the borrower defaults. If the borrower repays the loan, the transfer is void.
- Usufructuary Mortgage: The lender takes possession of the property and is entitled to its income (like rent) until the loan is repaid.
- English Mortgage: When a borrower gives their property to a lender, they agree to return it to them once the loan has been paid back.
- Equitable Mortgage: The borrower deposits the title deeds of the property with the lender as security without a formal mortgage deed.
The Legal Framework: Mortgage Deed Act
The laws governing mortgage deeds are typically found within broader property laws and regulations. In India, for example, the primary law that deals with mortgage deeds is the Transfer of Property Act, 1882. This Act provides the rules and regulations for transferring property, including through mortgages.
Important mortgage-related sections of the Transfer of Property Act, 1882
- Definition of mortgage under Section 58: defines a mortgage as the transfer of a portion of an immovable property with the intention of ensuring the repayment of funds advanced or to be advanced by way of loan, an existing or future obligation, or the fulfillment of an agreement which may result in a financial liability, is defined as mortgage in this section.
- Section 59: Mortgage When Assurance Deed Should Be Used: As per this section, if the principal amount secured is more than one hundred rupees, the mortgage should be executed through a registered document signed by the mortgagor and witnessed by at least two witnesses.
- Section 60 – Right of Mortgagor to Redeem: This clause gives the mortgagor the option to reclaim the property after the loan is settled, including any outstanding interest.
- Section 67 – Right to Foreclosure or Sale: This section outlines the rights of the mortgagee to foreclose or sell the mortgaged property in the event of the mortgagor’s failure to repay the loan.
Section 69 – Power of Sale When Valid: This section explains under what conditions the mortgagee can sell the mortgaged property without the court’s intervention.
How to Create a Mortgage Deed under the Transfer of Property Act
Creating a mortgage deed involves several steps to ensure it is legally valid and binding:
- Loan Agreement: The borrower and the lender have an understanding regarding the terms of repayment, interest rate, and loan amount, among other things.
- Drafting the Mortgage Deed: The mortgage deed is drafted to include details of the mortgagor and mortgagee, a description of the property, and the terms of the loan.
- Stamp Duty: The mortgage deed must be executed on stamp paper of the required value, which varies depending on the jurisdiction and the value of the property.
- Registration: The mortgage deed must be registered with the local sub-registrar office. Both the mortgagor and the mortgagee, along with two witnesses, must be present for the registration process. The registration involves submitting the deed along with necessary documents and paying the registration fee.
- Repayment: The borrower repays the loan according to the terms specified in the mortgage deed. Once the loan is fully repaid, the mortgage is discharged, and the property is free from the lender’s claim.
Types of Mortgages
There are several types of mortgages, each with its own characteristics, as outlined in the Transfer of Property Act:
- Simple Mortgage: The borrower pledges the property as security and agrees to repay the loan without transferring the property’s possession to the lender.
- Mortgage by Conditional Sale: The property is transferred to the lender on the condition that the transfer becomes absolute if the borrower defaults. If the borrower repays the loan, the transfer is void.
- Usufructuary Mortgage: The lender takes possession of the property and is entitled to its income (like rent) until the loan is repaid.
- English Mortgage: When a borrower gives their property to a lender, they agree to return it to them once the loan has been paid back.
- Equitable Mortgage: In lieu of a formal mortgage document, the borrower deposits the property’s title deeds with the lender as collateral.
A mortgage deed is a vital legal document that facilitates the borrowing of money using property as security. It provides security to the lender, legal protection to the borrower, and clear documentation of the loan terms. Understanding what a mortgage deed is and how it works is essential for anyone considering taking out a mortgage or lending money against property.