Introduction
Purchasing a property? Or perhaps your dream home? But it isn’t a day process. You want to buy property, and the best way to do that is with a mortgage. The bank or any other financial organisation grants a mortgage in return for the title of the property. It assures the lender that the loan will be paid back and also gives them a legal claim against the property in case of a default on the part of the borrower.
So borrowing money to buy a property is not as much of a thrill as it might seem. It’s crucial to know how the terms & conditions are (for your very own contractual agreement with the lender). This is where a mortgage deed can bypass all complications and ensure that the loan gets closed successfully. But what is a mortgage deed and what is its importance in a home loan? Let us explore!
What is a Mortgage Deed?
A Mortgage Deed is a written document that officially records the transfer of interest in a proposed property to the Lender from the Borrower to obtain a loan. The property is then offered as collateral until the borrower pays off the loan.
The deed forms the contract between the borrower and the lender, stating on what terms and conditions the borrower takes a loan against property. It specifies every condition of the loan, including the amount borrowed, interest rate, terms and how the lender can take possession of the property in the event that the borrower defaults.
What is a Mortgage?
To better understand what a mortgage deed is, let’s first know the meaning of a mortgage. A mortgage is a legal agreement between you (the borrower) and a lender, required to purchase a property where the property itself serves as a collateral to secure a loan. The property is pledged as security, authorising the lender to recover their funds by selling it off if you default on your loan repayments. There are various types of mortgages available, catering to your unique requirements and financial situations. For instance, there are fixed-rate mortgages where you need to pay a constant rate of interest throughout the loan term. On the other hand, in adjustable-rate mortgages, the interest rates vary depending on market fluctuations. Interest-only mortgage is another type of mortgage where you pay only the interest amount for an initial period, followed by the principal.
What is a Mortgage Loan?
A mortgage loan is a type of loan used to finance the purchase of real estate, such as a house or land. However, since it is a high-value purchase, the property is pledged as security or collateral to the lender to borrow money against it. The borrower repays the lump sum loan amount in regular monthly instalments over a certain period, say, 20-30 years. If you (the borrower) fail to repay your loan, the lender has the right to seize the pledged property and sell it to recover the outstanding amount.
How does a Mortgage Deed Work?
A mortgage deed is a lawful agreement between the borrower and the lender. It covers all the terms & conditions of the loan and protects your interests. The document gives the lender to have full rights to hold on borrower’s property as security until he/she fully pay back the loan amount. It also involves a provision for the mortgagee to repossess the property if the mortgagor is unable to pay the mortgage.
The deed is filed by both parties at the registrar's office, wherein the loan amount, EMIs, repayment term, and interest rates are mentioned. A "satisfaction of mortgage" is given when the mortgagor has paid the amount due on a mortgage and the lender no longer maintains an interest in the borrower's property.
Importance of a Mortgage Deed
A mortgage deed is a vital aspect of real estate funding. Let’s see why it is important for the borrower as well as the lender.
1. Legal safeguard: The mortgage deed specifies the rights and responsibilities of both the lender and the borrower and legally safeguards the interests of both sides.
2. Financial recourse: It permits the lender to foreclose and sell/lease the property in the event of default in order to compensate for financial damages.
3. Transparency: The deed clearly mentions all the terms & conditions and various clauses of the mortgage, ensuring no room for confusion.
4. Conflict Resolution: This deed kicks in as a legal document during disagreements, if any, between the parties involved.
Read also: Difference between Loan and Mortgage
Why is a Mortgage Deed Necessary?
A mortgage deed is necessary because it is a crucial legal document that protects both the borrower and lender by establishing the property as security against the loan and outlining the terms of the mortgage. For the lender, it secures the loan by authorising them to foreclose on the property in case the borrower defaults. The deed also establishes the rights and obligations of the borrowers, including their right to gain ownership of their property again upon repayment. The mortgage deed ensures legal compliance, provides transparency, and serves as a lawful document to address any disputes that may arise.
Types of Mortgage Deeds
Discussed here are some common types of mortgage deeds you may come across.
Type of Mortgage Deed | Clauses |
Simple Mortgage Deed | It is the simplest form of mortgage: the homeowner makes a promise to the lender to have the property seized if the loan is not repaid. But, borrower has possession of the property. The deed outlines the lender’s ability to take possession of the property if the borrower defaults. The former can neither sell nor rent out the property without the court’s consent. |
English Mortgage Deed | The mortgagor's title to the property is conveyed to the lender and held by the lender until the mortgage is paid off or the property is sold. This clause comes with the condition that the borrower can repossess once the latter is fully satisfied. |
Usufructuary Mortgage Deed | This mortgage deed is of the kind wherein the lender has the privilege to use the property and have a portion of its income/profit during the period of the loan. But the possessions still belong to the borrower. |
Mortgage by Title Deed | Here, the borrower agrees to sell the property to the lender. But if the loan is paid off as agreed, the sale is not completed, and the borrower has title to the property. |
Mortgage by Conditional Sale | The borrower agrees to sell the property to the lender under the condition that if the loan is repaid within the agreed time, the sale gets nullified and the borrower holds ownership of the property. |
Commercial Mortgage Deed | It can be used to borrow against commercial property purchases. |
Anomalous Mortgage Deed | It is a mixed mortgage type wherein the borrower and lender agree to specific terms & conditions tailored to their needs. |
Key Components of a Mortgage Deed
If you are applying for a loan against property, for the first time, you are likely to be confused while reading through pages packed with jargon.
So you must know what is mortgage deed meaning and what its essential elements are.
1. Involved parties: The deed identifies all parties to the loan, including the mortgagor (the borrower), the mortgagee (the lender), and any guarantors.
2. Property details: The document must present a clear description of the property. This would encompass its value, where it is located, the specifics of the property, material facts, etc.
3. Recital: This part serves to explain why the parties are getting into the mortgage deed.
4. Habendum: The Habendum determines exactly what right or interest the borrower and the lender have in the property.
5. Covenant for repayment: The deed describes how the loan will be repaid, including when, as well as the terms, period and other provisions of the loan.
6. Mortgage provision: Here, the rights of both parties are specified, including that of the lender to foreclose the borrower’s collateral property if the borrower can’t pay.
7. Possession clause: The mortgage deed format should lay down the terms of possession, such as who will be in possession of the property during the term of the loan and who will bear the responsibility for maintenance.
8. Liquidation: What if the mortgagor goes into liquidation? The mortgage deed has to state what is to happen to the collateral property under these circumstances.
9. Redemption clause: The clause might specify a deadline by which the borrower in default can pay the loan and reclaim their property rights. It also describes the redemption of property.
Conclusion
An obligatory contract in the home loan process is a mortgage deed. Getting to know what it is, how it works, and what procedures are required for its implementation will enable you to make decisions and protect your interests.
Frequently Asked Questions (FAQs)
Q.1. What happens after a mortgage deed is executed?
After the mortgage deed is executed, it must be registered with the Sub-Registrar’s office where the said property is registered with. You must also pay the stamp duty on mortgage deed. This is important for the document to be legally effective and provide the lender with the right to the property until the loan is fully repaid by the borrower. Formally recording the deed makes it a legally-binding contract, outlining the lender’s authority to sell the property if the borrower defaults and the latter’s remedies to regain ownership upon complete repayment.
Q.2. How does a mortgage deed function?
A mortgage deed works as a legal contract between the borrower and the lender, wherein the former pledges their property as collateral for a loan. The deed also outlines the terms & conditions of the mortgage, and gives the lender the right to foreclose or repossess the property if the borrower fails to repay the loan.
Q.3. Can a mortgage deed be altered or modified?
You cannot change the clauses and conditions of a mortgage deed unless the parties have consented. You usually need either an addendum or an additional agreement to amend the deed.
Q.4. What rights does the mortgagor have under a mortgage deed?
Under a mortgage deed, the mortgagor (borrower) has the right to the equity of redemption which allows them to terminate the mortgage at any time and reclaim full ownership of the property by repaying the entire outstanding amount and any interest applicable. This ensures that the mortgagor can get back all documents and regain possession of the property if the mortgagee already has it in case of a loan default. The mortgage deed allows the borrowers to have the property lawfully re-transferred into their name or directed to a third party. The mortgagor also has the right to transfer the interest in the property to a third party, make improvements or additions to the property, or grant a lease.
Q.5. How long does it take to register a mortgage deed?
It usually takes days, depending on the efficiency of the powers that be and the legal process.
Q.6. Is it possible to execute a mortgage deed online?
The IT Act amendment in India and the introduction of e-Deed has made it possible to execute and register a mortgage deed online. Check with the respective website of the state where the property is registered with.
Q.7. Can a mortgage deed be amended or canceled after being signed?
One can amend or cancel a mortgage deed after it is being signed; however, it will require legal approval and mutual consent of both parties – borrower and lender. At the same time, such changes or amendments should adhere to applicable laws and the registration process must remain valid.
