This article is written by Vidhya Sumra, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho).
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For many people, having a home is a dream come true. Getting a mortgage is simply one of the many procedures that most homeowners must take to become homeowners. Before we get started, let us go over some mortgage essentials. To begin, what exactly does the term “mortgage” imply?
A mortgage is a loan used to purchase a home, land, or other real estate property. The borrower promises to repay the lender over a specified duration, typically in a series of regular payments that cover both principal and interest. The property serves as collateral for the loan. Borrowers can apply for a mortgage through one of the banks or financial institutions and must meet certain requirements, such as minimum credit ratings. Mortgage applications go through a lengthy underwriting process before they reach the closing stage. Conventional and fixed-rate loans are two different types of mortgages that are based on the needs of the borrower. This article lists the essential clauses of a mortgage deed between a mortgagor and a housing finance company.
Essential components of a mortgage
A mortgage loan, also known as a property loan, is a transfer of interests in a specific property to secure a loan that has been advanced or will be advanced in the future. In other words, when a person takes out a property loan, he must pledge some property as security to the lender so that the lender is assured that if the loan is not repaid on time, the lender would be able to recover the debt from that particular property.
“Mortgagor/Borrower” refers to the person who mortgages his home to secure the loan. The person or organisation to which the property is mortgaged is referred to as the “Mortgagee/Lender.”
The following are the most important things to know with regards to mortgage:
- Mortgages are loans used to purchase homes and other types of property.
- The property itself is used as a security for the loan.
- Fixed-rate and flexible-rate mortgages are two types of mortgages accessible.
- A mortgage’s cost is determined by the type of loan, the period (such as 30 years), and the interest rate charged by the lender.
- Mortgage rates vary greatly depending on the type of product and the applicant’s credentials.
What is the process of getting a mortgage?
Mortgages are used by individuals and businesses to purchase real estate without paying the whole purchase price upfront. The borrower pays back the loan plus interest over a set period until they acquire the property outright. Liens against property or claims on property are other terms for mortgages. If the borrower defaults on the loan, the lender has the option to foreclose on the property.
For example, a residential buyer mortgages his or her home to their lender, who then has a claim on the property. If the buyer defaults on their financial obligations, this protects the lender’s interest in the property. In the event of a foreclosure, the lender has the option of selling the property and using the proceeds to pay off the mortgage debt.
The two most common types of mortgage in India are.
An English mortgage transaction is a valid sale in which the mortgagor conveys the property to the lender under a binding agreement that the lender would re-transfer the property to the mortgagor upon repayment of the money to the lender on a specific date.
An equitable mortgage is created in favour of the lender by depositing the title deed of immovable property as security to the lender until the loan is fully repaid.
Differences between English mortgage and equitable mortgage
|The mortgagor lends the mortgagee the immovable property, which the mortgagee delivers to the mortgagor at a later point after the loan or mortgage money is paid.
|If the borrower makes the payment, the mortgagor transfers the property to the lender with an inbuilt condition that makes the sale void.
|From the start, the sale transaction is complete.
|The sale is not final at this time and is based on a future event.
|Stamp duty and registration fees will apply at the time of taking the loan and at the time of repayment.
|It is possible that stamp duty and registration fees are not involved in it.
What is a mortgage deed?
The “Mortgage Deed” is an instrument or legal document that includes different terms and conditions related to the mortgage. It gives the lender interest as well as legal rights to the property. All of the borrower’s rights and interests in the property pledged as collateral are therefore formalized in the Mortgage Deed. This protects the lender since if the loan is not paid on time, he can exercise his legal rights over the property.
Essential clauses in a mortgage deed
As informed above, now that we have a fundamental understanding of the mortgage and mortgage deed, let us look at the essential clauses in the mortgage deed.
The following are the main clauses of the mortgage deed.
It is important to specify the title of the agreement/deed. For eg. INDENTURE OF MORTGAGE.
The names of the parties i.e. mortgagor and the mortgagee must be specified in the mortgage deed. The mortgagor is the person who provides the interest in his property as security to obtain a loan, whereas the mortgagee is the person to whom the interest is transferred. The mortgagor, as defined by the Indian Contract Act, 1872, must be competent to enter into a contract, although the mortgagee may be a minor. According to contract law, he may not be competent.
“ABC PRIVATE LIMITED, a company within the meaning of the Companies Act, 2013, having corporate identity number (CIN) ________ with its registered office at ______ (hereinafter referred to as the “Mortgagor”, which expressions, unless repugnant to the context or meaning thereof, shall be deemed to mean and include its successors and permitted assigns);
IN FAVOUR OF
XYA FINANCE PRIVATE LIMITED, a company within the meaning of the Companies Act, 2013, with its corporate identity number (CIN) ________ and having its registered office at ____________(hereinafter referred to as the “Mortgagee” which expression, unless repugnant to the context or meaning thereof, shall be deemed to mean and include its successors and permitted assigns).”
Recitals are the initial statements in an agreement that indicate the parties’ intention to enter into the contract. The recital, often known as the preamble, provides a list of the agreement’s characteristics. It usually begins with a phrase like WHEREAS.
- The Mortgagor is engaged in the business of _______ including construction and development of hotels and other commercial real estate projects in India.
- The Mortgagor, pursuant to the loan agreement dated __________ had agreed to avail financial assistance to the extent of up to Rs ______ (Rupees___), on the terms and conditions set out in the Existing Loan Agreement.
- As on the date hereof, the Mortgagor legally and beneficially owns the Mortgaged Properties, as more particularly provided in the First Schedule hereto.”
Grant of mortgage
This is one of the main clauses of the mortgage deed. This explains that in consideration of the lender advancing the loan to secure the loan amount, the mortgagor creates the charge over the properties in favour of the mortgagee also grants, transfers, conveyes, assigns and assures the rights and benefits over the mortgaged properties.
- For the consideration and continuing security for the discharge of the Secured Obligations, the Mortgagor hereby creates in favour of the Mortgagee, a mortgage by way of an exclusive first ranking charge over the Mortgaged Properties as security interest against the Loan Agreement dated ________.
- The Mortgagor further grants in favour of the Mortgagee, all rights, liberties, privileges, advantages and benefits whatsoever to and arising in relation to the Mortgaged Properties.
- Notwithstanding anything contained, it is hereby declared that the Mortgagor has neither given or agreed to give possession of the Mortgaged Properties to the Mortgagee.
- Until an Event of Default (as defined in Clause ___) arises, it is understood between the Parties that the Mortgagor shall remain as the sole owner and shall have custody over the title documents over the Mortgaged Properties.
Covenant to pay
This clause specifies the terms and conditions of the repayment of the loan amount. The total amount and repayment schedule of the loan amount are also specified in this clause or as scheduled in the loan agreement. The main intention is that mortgagor covenants and agrees to comply with the terms and conditions of the finance documents and to repay the loan amount to the lender.
“Pursuant to the Finance Documents and in consideration of the Mortgagee extending the Loan to the Mortgagor, the Mortgagor covenants and agrees with the Mortgagee that it shall comply with the terms and conditions of the Finance Documents and that the Mortgagor shall discharge the Secured Obligations in accordance with the terms and conditions of the Finance Documents, including this Indenture.”
As we know, the borrower mortgages the property to secure the loan amount under the mortgage deed. In this clause, the mortgagor confirms that the security provided by them constitutes adequate, good and valuable consideration.
“The Mortgagor confirms and declares that it has undertaken to provide security creating first ranking charge by way of mortgage over the Mortgaged Properties in favour of the Mortgagee in consideration of the Loan to the Mortgagor and that such constitutes adequate, good and valuable consideration.”
The mortgage deed should have other clauses like nature of security, representations and warranties, insurance, the event of default, enforcement, and other miscellaneous clauses like an arbitration clause, governing law and jurisdiction. These are basic clauses and must be included in the agreement. It should be clearly specified before entering into an agreement in order to avoid any future disputes.
To summarise mortgages, consider the following brief questions to gain a better understanding of mortgage deeds:
- Who owns the title?
There are two parties involved in a mortgage deed i.e. the buyer and the lender. For the term of the loan, the lender owns the deed.
- Is registration compulsory?
As mentioned above, under the mortgage by deposit of title deeds, the title deeds of the mortgaged properties are handed to the mortgagee by the mortgagor as security. So it does not require payment of registration or stamp duty.
In the case of the English mortgage, like Indenture of Mortgage, stamp duty and registration is compulsory.
- Who has the authority to sign a mortgage deed?
The witness must be at least 18 years old, not a relative, not a party to the mortgage, and not a resident of the property. A mortgage advisor may or may not be an admissible witness depending on your new lender.
- Why is witness compulsory?
Mortgage deeds, without a doubt, require a wet signature that is physically witnessed in order to be legally enforceable. As a result, an endorsement of the deed’s integrity is required to verify that the document being signed is a true duplicate of the final deed.
To conclude, a mortgage deed is a document that covers all terms and conditions of the loan advanced to the borrower by the lender. The deed contains information on the loan, such as the parties involved, the property given as collateral, the loan amount, the interest rate, and more. The deed explains everything there is to know about the property’s interest and title. It aids in the identification of the rightful owner of the mortgaged property. It is important to understand the terms and conditions of the agreement, which is why understanding the mortgage deed’s main clauses is even more critical.
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