Jackie’s Journaling: Day 75 – Concepts in Housing Loans (Dispatch 3)

This is a continuation in the series of dispatches about the Housing Loans space in India. We have covered 2 dispatches prior to this. In case you haven’t read them – I suggest you check them out first. Dispatch 1 (which gives an overview of the space) and Dispatch 2 (which talks about tax benefits and metrics to be evaluated when taking a housing loan) . ?

This dispatch 3 of this series – we’ll walk down the path of different types of interest rates as well as the different kinds of Mortgages in India. Read on further, and as always, do share your feedback and comments

What is the difference between Fixed and Floating Rate of Interest?

• If you take any loan in India, you can choose between Fixed rate and Floating Rates
• Both these rates have their own set of pros and cons
• The table below gives a good understanding of what to factor in when choosing between Fixed and Floating
• Conceptually, it is easier to understand Fixed Rate loan – and hence many customers opt for it

However, if understood well, then choosing the correct rate regime based on macro-economic environment and interest rate cycles maybe the best option?

What are the different kinds of Mortgages possible in India? Which of these are most common?

First, let’s understand what is a Mortgage? In simple terms, a Mortgage is

• part of process in which
• you obtain secured loan from a Financer
• by pledging your fixed property

Here’s a very simplified way to understand concept of Mortgages. Let’s say that Financer A lends some money to Ramesh. They may do so without asking for any security or he may demand some security to act as collateral against the money lent. If Financer A lends money without any security, and Ramesh subsequently isn’t able to repay, then Finance A loses all the money. However, in a situation where Financer A has lent the money and created a Mortgage on it, then in the event of Ramesh not being able to repay, the Financer has right over the property and can liquidate/sell it as per due process to recover some or all of the dues.

The core aspect of a mortgage is that it is a transfer of a legal interest in the property with a provision that upon repayment of the loan, the transfer shall become void or the interest shall be re-conveyed. The provisions pertaining to a mortgage are contained in Section 58 of the Transfer of Property Act, 1882

?There are 6 types of Mortgages possible in India.

1.??????Simple Mortgage / Registered Mortgage: This is the most common kind of Mortgages in India. Following criteria is to be met for a Simple Mortgage:

a)??????The Mortgager binds himself to personally repay the mortgage money

b)?????In the event of breach of contract, the Mortgagee has the right to sell the mortgaged property, and the proceeds of sale is used in lieu of payment of the mortgage-money

A simple mortgage can be created only through a registered document.

2.??????Mortgage by Conditional Sale: The mortgagor sells the property to the mortgagee on the condition that once the repayment of mortgage money is complete, the sale shall become void. In the event of inability to repay mortgage money by a certain date, the sale of property shall become absolute.

3.??????Usufructuary Mortgage: Where the mortgagor delivers possession of the mortgaged property to the mortgagee. And authorizes him to retain such possession until payment of the mortgage-money. During the period, the mortgagee can receive the rents and profits accruing from the property in lieu of interest, or in payment of the mortgage-money, or partly in lieu of interest and partly in payment of the mortgage-money.

4.??????English Mortgage: The mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage

5.??????Equitable Mortgage / Mortgage by Deposit of Title Deeds: In this kind of mortgage, the mortgager deposits all his property documents with the mortgagee (Financer). This is a bi-partite agreement between the Mortgager and Mortgager by virtue of title deed document deposition. This has been created for ease of execution, if the mortgager wants to speedily raise funds.

?At the core of this transaction lies the intention that the title deeds shall be security for the money borrowed (debt). Merely handing over the title deeds does not create a mortgage. The deeds need to be delivered in the performance of that agreement that they are security for the debt.

?6.??????Anomalous Mortgage: Any mortgage that isn’t one of the five mortgage types mentioned above qualifies as an Anomalous Mortgage.

Across India, Simple Mortgages and Equitable Mortgages are the most commonly used by Financers. While Equitable Mortgages maybe faster, and slightly less costly, the Simple Mortgage ensures that agreement is recorded in Registrar’s Office and thereby has backing of the law of the land. Registration Fees while taking a home loan varies depending on whether you have opted for a Simple Mortgage (Registered Mortgage) or Equitable Mortgage.

The obvious next question that arises is this: What are the provisions within Indian Law for Enforceability of Equitable Mortgages (since they are not registered)?

We’ll cover this in one of our next dispatches, where we introduce the concepts of SARFAESI and CERSAI. We’ll also cover details about the Legal and Technical checks that are done by Financers before your home loan is sanctioned. Keep reading on, and do share your feedback and comments.?