Difference Between A Registered And Equitable Mortgage On A Home Loan
What Is A Mortgage?
Mortgage refers to the transfer of an interest in a property to borrow money. The transferor is called a mortgagor, the transferee a mortgagee, and the principal money and interest of which payment is obtained for the time being are called the mortgage-money, and the means by which the transfer is caused is called a mortgage-deed. The mortgage is a means of acquiring some financial interest.
When you take a home loan, you have to submit all your original ownership documents to your bank. This acts as a security for the bank when they lend you money to buy a house. But you should know, there is more than one type of home loan arrangement and each can affect you differently.
There are two important types of mortgage that can affect your home loan. The arrangement usually depends on the parties involved. In a home loan, there are two primary aspects – a home loan borrower and a home loan bank/housing finance company.
When you take a home loan, the most common arrangement is one where the bank lends you money and you present the original title documents to the bank as a mortgage. This is called an ordinary mortgage. Now, if you are able to repay your loan regularly then everything is simple and easy.
However, for some reason, if you are unable to pay your loan, the bank has the right. These rights are defined by the type of mortgage arrangement you entered into. Hence, you should consider closely what agreements you are signing while taking a loan. There are two such important forms of agreement:
Registered Mortgage
In simple terms, a registered mortgage is a category of loan where the borrower voluntarily gives the bank full rights to the property in case of loan default. In such a scenario, you as a borrower have allowed the bank to dispose of the property which you can default the loan if you want. In simple terms, in a registered mortgage, the borrower has to make a statement on the property with the sub-registrar through a formal, written process as proof of transfer of interest to the lender as security for the loan. A registered mortgage is also known as a ‘Deed of Trust’.
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. However, if the borrower fails to repay the loan (i.e. interest and principal component) in full, the lender will have the right to occupy the property.
This defends the bank in three circumstances:
- If the property is in dispute, the bank will have rights over the other parties
- The borrower cannot sell the property dubiously under the loan several times since it was recorded in the sub-registrar’s records.
- In case of default, the ownership of the property is transferred to the bank. Bank can do what it wants with it.
Equitable Mortgage
An equitable or simple home loan is the most common form of home loan. In this case, when you borrow money from a lender, the property documents remain with the lender. The tenure of a home loan is 15-20 years long and the papers come back to you only after the loan is fully repaid. During an equitable mortgage, you give ownership of your property to your bank until you repay the entire amount. If you default the loan then you allow them to occupy your property.
A memorandum of the title deeds deposit is made from the borrower’s end. This memorandum is a record of all the documents submitted to the bank, it also states that the borrower has voluntarily submitted all the home loan documents and stamp duty has been paid. The fee to be paid for stamp duty is called MODT. Charges from 0.1% to 0.2% of the value of the home depending on the state you live in. It is also mandatory to record MOD (Memorandum of Deposit) with an institution called CERSAI (Central Registry of Securities Asset Reconstruction and Security Interest).
Usually, a bank opts for a simple or equitable home loan agreement. But in some cases, they may insist on a registered agreement. Let’s take a look at how these two compare against each other.
Difference Between Equitable & Registered Mortgage
| Factors | Equitable Mortgage | Registered Mortgage |
| Registration | Equitable mortgages are not registered | A registered mortgage is registered |
| Process | You have to buy stamp paper in Equitable Mortgage | In a registered mortgage, a borrower must contact the Office of the Sub-registrar. |
| Cost Involved | Stamp Duty costs – 0.1% or 0.2% of home value | It’s 5% of the home value |
| Affordability | It is less expensive than a registered mortgage | It is more expensive than an equitable mortgage |
| Bank’s Rights | If you fail to repay the loan, the bank takes over your property and auction it off. | If you fail to repay the loan, the property is transferred to the bank and it can do what it wants to do with it. |
| Risk | An equitable mortgage is riskier than registered. | Whereas, a registered mortgage is risk-free due to the security it provides to both parties (lender and borrower) on the property. |
FAQs
How Is An Equitable Mortgage Formed?
The borrower must submit his title deed to the lender as security for the money loaned. The deed serves as proof that the mortgagee has deposited the title with the debt of his property.
When A Registered Mortgage Is Formed?
A registered mortgage is required to create:
- When the original title deed is not available.
- Equitable mortgage can only be made in notified towns, if a mortgage is required to be made in a city that is not notified, a registered mortgage is required to be made.
Is It Necessary To Register An Equitable Mortgage?
An equitable mortgage will not impose any stamp duty. It does not meet all the requirements of a legal mortgage according to mortgage law. During an equitable mortgage, you give ownership of your property to your bank until you repay the entire amount. If you default the loan then you allow them to occupy your property.
Why Banks Prefer Registered Mortgages?
Banks prefer Registered Mortgages as the Equitable Mortgage lacks records of loans on property in the office of Sub-Registrar. In an equitable mortgage, only the lender and the borrower are aware of the mortgage/charge made on the property. This leaves the possibility of the property being sold to third parties without fully paying the debt. The new buyer may not be aware of the mortgage because there is no record, and the mortgage is created only by the exchange of words. Therefore, banking institutions consider an equitable mortgage as a misleading and preferred registered mortgage.
