It is indeed an easy way out to establish an equitable mortgage and given the lesser cost involved most of the home loans and loan against other property types are backed by it.
It is to be noted that mortgage as per the 'Transfer of Property Act 1882' is defined as A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability".
In simple terms, mortgage is the preliminary requirement when it comes to home or home improvement loans of financial institutions such as banks and HFCs as any default then can be recovered by the bank by exercising the legal rights on the property whose rights remain with the bank during the loan tenure. And basically there are two types of mortgage, registered and equitable mortgage. Herein we will discuss the more simplified and less costly method of equitable mortgage.
Process of creating an equitable mortgage
The process involves merely depositing title deed in respect of the property against which loan is being advanced say gift deed, title deed or partition deed etc and other associated papers. Then we need to execute a memorandum of deposit of title deeds.
Herein it is to be noted that while the memorandum of deposit of title deed is not registered, still stamp duty is payable in the state of Karnataka. But there shall be no mention of the charge on the property in the books of registering authorities. So, no mortgage charge entry will be made in the Encumbrance Certificate issued by the Sub-Registrar's office.
This type of mortgage is also referred as implied or constructive mortgage with no legal formalities being involved and is under equity meaning to say mortgage is executed in the interest of justice.
Pros of equitable mortgage
- More economical and hassle free with no legal take- In some of the states the stamp duty and other charges go as low as 0.1% of the loan amount while the cost involved in case of registered mortgage is comparatively higher. And in some of the cases, the charges are sometimes payable once when the charge is being established and when the loan account is being closed.
- Title deed returned as it is: Upon successful completion of the loan repayment procedure, one can easily secure the title deed once again from the lender.
- No documentation with sub-registrar: It is a hassle free way as no registration process is involved neither at the time of creating a charge on the property nor when the property is being released.
Cons of Equitable mortgage
While it is easy way out for the borrower, sometimes it is also used to dupe lenders as borrowers may conceal the mortgage and sell the property to a third-party on the notion that the original title deed has been lost etc. Ann so the new buyer gets the property but with the mortgage liability. And so being a grave reason of surging NPAs with the bank, financial companies prefer registered mortgage as this way it is difficult to make out who the genuine borrower is indeed.