English Mortgage

An English Mortgage is defined under Section 58 of the Transfer of Property Act 1882.

Introduction:

  What is an English Mortgage?

        English mortgage is basically a type of mortgage wherein, the mortgagor(borrower) gives the rights of property to the mortgagee (lender) in case of payment default or repayment failure. In an English mortgage system, the mortgagee has the right to sell the property to recover the loan amount given to the mortgagor. 

Section 58(a) of the Transfer of Property Act, 1882, defines a mortgage as under:

         “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.”

From the definition, it becomes apparent that a mortgage is done only for an immovable property, in order to secure repayment of a present, as well as future liability.

Meaning:

    Where 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.”

it becomes apparent that for all practical purposes the transaction is a proper sale, except that the mortgagor, which means the borrower, has to give a binding commitment to the lender that he will repay the money on a prefixed date. As the mortgagor is transferring the immovable property absolutely to the mortgagee, like a proper sale transaction, the transaction will be subject to applicable stamp duty on the market value of the property, on the date of execution of the documents of English mortgage

Types of mortgages as under the :

● Simple mortgage

● Mortgage by conditional sale

● Usufructuary mortgage

● English mortgage

Mortgage by deposit of title deed (This is most prevalent in case of home loan transactions and is also known as equitable mortgage).

Anomalous mortgage:

         Out of the above, only two types of mortgages, i.e., simple mortgage and mortgage by deposit of title deed, are prevalent in India and others are of academic interest only in India.

Major features of an English Mortgage:

 In an English mortgage scheme

The mortgagor (borrower) binds themselves to repay the loan to the mortgagee (lender) within a specific time period till a specific date.

● During the loan process, the mortgagee acquires rights to the property from the mortgagor.

● The mortgagor can claim his/her property back after the loan is completely paid off

● During the loan period, mortgagees can allow the mortgagor to occupy or rent out the property.

● In an English mortgage scheme, there is a proper transfer of property from the borrower to the lender, hence the stamp duty and registration charges are applicable as is the case in any other transfer of property.

● The sale agreement has details of the loan and all the terms associated with it.

● When the mortgagor repays the loan, the property is re-transferred in his/her name which attracts stamp duty and registration charges again.

● In Indian real estate, an English Mortgage is the least opted form of mortgage. There are a few reasons attached to it.

The documentation:

        Along with a loan agreement, you also have to get a mortgage deed made for an English Mortgage. If there are more than one lender, all of them can claim their proportionate share in the property, if the need arises. Also, the mortgage deed forms a part of the loan process and is not a stand-alone document. The terms and conditions of the mortgage deed can be according to specific needs and requirements of the contracting parties.

Drawbacks:

      When compared with other types of mortgages, costs involved in an English Mortgage scheme are higher. In an English Mortgage, a property is transferred in the name of the lender first, and then in the name of the borrower, when he repays the loan amount. Due to this, the stamp duty and the registration charges are required to be paid twice. This ultimately increases the cost of borrowing for the borrower.

English mortgage in India: Why is it not popular?

   There are various reasons for the English mortgage not becoming popular in India:

     Not only at the time of taking the loan but also at the time of repayment of the amount, the parties have to pay applicable stamp duty and registration charges. Looking at the rates of stamp duty of upward of 5% in India and 1% registration charges, an English mortgage will increase the cost of transaction of borrowing by an average of 12%. Against this the transaction of equitable mortgage (mortgage by deposit of the title deed, which is permitted in a few cities) is relatively easy, with almost the same impact where the cost is minimal. Under the mortgage by deposit of title deed the borrower just deposits his title deeds with the lender. Except in the state of Maharashtra, it does not have stamp duty and registration cost implications, if it is done through recording of the transaction in the register of equitable mortgages maintained by the lender.

Conclusion:

Only a few mortgagors and mortgagees in India can engage in English Mortgage scheme

There is a huge cost involved in English mortgages as the stamp duty and registration charges are paid twice due to transfer and re-transfer of property.

The mortgagee’s right to sell the property without court intervention in the case of inability of mortgagor is one of the major drawbacks, hence borrowers don’t opt for this form of mortgage.

An English mortgage is valid when a mortgage deed and a loan agreement have been signed by both the parties. It is mandatory to have all the terms and conditions clearly defined in these documents for both, mortgagor and mortgagee.

Reference:

https://www.fullertonindia.com/what-is-mortgage-deed.aspx

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