This article has been written by Neha Mallik, studying at Vivekananda Institute of Professional Studies, affiliated to Guru Gobind Singh Indraprastha University. This article gives an understanding of mortgage deed and its essential elements. It also highlights the important clauses which are to be kept in mind, being a party to the mortgage deed.
The other day, one of my friends and I were discussing buying a new home. He told me about his plans. He is well sorted that he would soon buy a new home. He has a well to do job and earns a handsome salary. He spotted a house and very keen to buy that one. He has already talked to a bank executive to finance a home loan. But he was not acquainted with the documentation and legal work required for financing a loan. He asked me about the Mortgage. Buying real estate or taking loans from banks is not a day process. When you are new to the property game, it’s best for you to take instructions from a solicitor before taking any step ahead. When you are buying a home with a mortgage, it’s good to have knowledge about all the terms & conditions related to the Contract you are entering into.
If you are purchasing a property for the first time or thinking about buying in near future, you need to have an understanding of all the contracts you are entering into even if you are not a legal professional. Because in the end, you are the one who bears all the repercussions. I want everyone to know about the mortgage deed and its essential elements. I have also highlighted some necessary clauses which should be kept in mind while signing a mortgage deed.
What is a Mortgage?
Before diving straight into the mortgage deed, first, we need to understand what a mortgage is?
In India, Mortgage is governed under Section 58 to 104 of the Transfer of Property Act, 1882. A Mortgage can be defined as the transfer of interests in a specific property to secure the loan advanced or to be advanced in the future. In other words, we can say that when any person takes a loan from anyone, some security is required to be kept with the lender to have the assurance that in case of default in the repayment of the loan, the lender can recover his money from that security.
The person who mortgages his property against the loan is called “Mortgagor.” Whereas the person to whom the property is mortgaged is called Mortgagee” and the terms and conditions related to mortgages are contained in the “Mortgage Deed”.
Most common forms of mortgages
Simple Mortgage or Registered Mortgage [Section 58(b)]
According to Section 58(2) of the Act, a property can be mortgaged:
- Without delivering possession of the mortgaged property.
- When the mortgagor binds himself personally to pay the mortgaged money by execution and registration of a mortgage deed. In the deed, he agrees that in case of his failure to pay the money, the mortgagee shall have the right over the property. The latter can sell the property to recover his money.
Mortgage By Deposit of Title Deeds [Section 58(f)]
In English Law, a mortgage of this type is known as “Equitable Mortgage” as opposed to a legal mortgage because in this kind of Mortgage there is simply a deposit of document of the title without writing or any other legal formalities. This Mortgage, therefore, does not require any writing and being an oral transaction, is not affected by the law of registration.
Section 58(f) of the Act says that in the notified towns specified by the State Government in the official gazette, any person can deliver his title deeds of immovable property to the banks with the intent to create security.
Essential elements of the Mortgage by deposit of title deeds
- There must be a debt.
- There must be delivery or deposit of title deeds.
- There is an intention that the deed shall be deposited for the purpose of securing the loan.
- There are territorial restrictions.
Other Mortgages include
- Mortgage by Conditional Sale: The Mortgage is an ostensible sale with the condition that property would go back to the real owner after the repayment of the mortgaged money.
- Usufructuary Mortgage: Here, the possession of the property is transferred to the mortgagee. The mortgagee can even earn the income from the given property.
- English Mortgage: After the transfer of the property, the mortgagor personally binds himself to pay the money on a specified date as per the agreement.
- Anomalous Mortgage: any other kind of Mortgage or combination of the above-defined mortgages come under the category of Anomalous Mortgage.
What is a Mortgage Deed?
Section 55(2) of the Act, talks about some relevant covenants or agreements which the parties are required to enter into for the conveyance of immovable property such as lease, sale, Mortgage, gifts etc. The mortgage deed is an instrument or a legal document containing terms and conditions relating to the Mortgage. The deed provides the lender with the interest and legal rights over the property. All the rights and interests over the property that the borrower has pledged as collateral are legalized in the Mortgage Deed. In case of any default or failure to pay the loan amount, the lender can claim his legal rights over the property.
Registration of Mortgage Deed
Registration of mortgage deed is essential to give legal validity to the document. In case of Mortgage by Delivery of Title Deed, registration is not required. Following are the conditions which need to be fulfilled for a valid registration:
- The deed must be signed by the Mortgage.
- At least two witnesses must attest to the deed.
- Stamp duty must be paid accordingly; otherwise, the document is not enforceable.
When is the Mortgage Deed required?
- It is generally required when you are loaning money from another person or business and want to transfer the interest of the property to another person.
- When you want to borrow money and are required to mortgage your property as a collateral. The deed helps you secure your rights and interest over the property.
Why is the Mortgage Deed required?
- The first and foremost requirement of the mortgage deed is to determine the parties to the deed, i.e. the Borrower/Mortgagor and the lender/Mortgagee.
- The deed enforces the rights of the lender in the Court. It ensures that in case of the default or delay in repayment of the loan, the lender will get paid by selling the property.
- The mortgagee has the right to foreclose on the property in case the mortgagor stops paying or breaches the terms of the Contract.
- The deed gives a thorough investigation as to the interest and title over the property. It helps to determine the rightful owner of the mortgaged property.
- The mortgage deed helps to determine the loan amount and the rate of interest.
- The mortgage deed also gives the right to the mortgagee to take possession of the property, if specified in the Contract.
- The mortgage deed acts as evidence that the property is transferred to the lender.
Essential elements of Mortgage Deed
I hope now you have understood the basics of a mortgage and mortgage deed by now. Being a layman, you might not understand the legal language used in a contract. You might leave such things on your legal representative, but you should at least have the basic understanding of the clauses and terms in a Mortgage Deed. Following are the clauses in the Mortgage Deed which you must understand:
It is essential to specify the name of the mortgagor and the mortgagee in the mortgage deed. The person who transfers the interest of his property as collateral to take a loan is called mortgagor, whereas the person to whom such interest is transferred is called the mortgagee. It must be noted that the mortgagor must be competent to enter into a contract as per under the Indian Contract Act, 1872 whereas the mortgagee may be a minor. He may not be competent as per the Contract Law.
Description of the Deed
It is essential to specify the title of the deed in capital letters for example “THE DEED OF MORTGAGE.”
Details of the property
In this clause, all the material description of the mortgaged property should be specified. For e.g.: the location of the property, the value of the property, its specification and all the material facts which need to be disclosed should be mentioned.
Recitals in a contract are the introductory statements disclosing the intention of the parties to enter into the Contract. The recital is also called the preamble containing a few characteristics of the agreement. It usually starts with a sentence like “Whereas the mortgagor has agreed” or “whereby the mortgagor has the rights”.
This particular clause determines the quality or extent of the interest of the mortgagee and the mortgagor over the mortgaged property. The provision defines the rights that the mortgagee is going to enjoy over the property. It also restricts the rights of the mortgagee as per the agreement.
Covenant for repayment
This clause specifies the modes and conditions for the repayment of the loan amount. The clause also recites the consideration and tenure for the repayment of the mortgaged money. It also specifies what are the conditions when the mortgagor wants to pay the loan before the stipulated time period.
This clause highlights the type of Mortgage the parties have agreed. It is the most important clause of the mortgage deed as all the rights and duties of both the parties are dependent on the type of Mortgage by which the property is being mortgaged. Say for example, in the English Mortgage the mortgagee has the absolute right to sell the property. While the simple mortgage possession of the property is not necessary. The clause also describes the duty of the mortgagee and mortgagor like:
- In case the mortgagee has repaired the property, he can claim the money from the mortgagor if given in the Contract.
- The mortgagor shall repay all the other costs.
- If it is specifically mentioned in the clause that the mortgagor cannot lease the mortgaged property without taking the prior permission of the mortgagee, the former cannot do so without the consent of the latter.
The clause decided whether the mortgagor has the right to exercise possession over the mortgaged property or not. It also depends upon the type of Mortgage you are choosing to mortgage the property. E.g., in the simple Mortgage, the possession may remain with the mortgagor. On the contrary, in the Usufructuary Mortgage, the possession of the mortgaged property must be delivered to the mortgagee.
The above clause clarifies as to what title deeds need to be transferred to the mortgagee. If it is given in the clause that all the title deeds related to the mortgaged property must be given to the mortgagee, then the mortgagor shall transfer all the documents of the title deed to the mortgagee.
This clause is an essential clause in the mortgage deed as it specifies the treatment of mortgaged property in case the mortgagor is declared insolvent.
In this clause, all the documents which are necessary for making the deed valid and identifying the parties are specified. For e.g.: PAN card, Adhar card, Passport, Bank passbook, Property Documents, Voter’s ID, Driving License.
Redemption is again the most important and fundamental right possessed by the mortgagor. It is an essential attribute of the transaction of the Mortgage. It’s a statutory right given to the mortgagor under Section 60 of the Act. The clause specifies the tenure of the mortgage deed as to when the mortgagor is entitled to get his property back. The clause says that on payment of the principal and interest after the expiry of the due date for the repayment of money, how the property is supposed to go back to the real owner of the mortgaged property.
Attestation and stamp duty
It is pertinent to state that the mortgage deed shall be duly registered and stamped to have legal validity. In case of a Simple mortgage, if the deed is not signed, registered and attested by at least two witnesses, it is equivalent to not having a contract in the first place. The criteria of attestation and registration depend upon the kind of Mortgage. There are some kinds of mortgages that require no registration and attestation if the principal money is less than 100 rupees.
The nominal stamp fee must be paid. The stamp fees depend upon the state the property is located.
Certain clauses which should not be ignored
We generally take loans from banks. They usually have standard contracts. We just sign them without reading the whole agreement, which later on hurt us. So it is essential to read the following clauses carefully:
We have to be very careful about the interest rates charged by the mortgagee. Sometimes it is a fixed rate, but sometimes the rates can be fluctuating, which is a matter of concern. The fluctuating interest rate empowers the mortgagee to change the interest rates according to the fluctuations in the base rates. So whenever you are signing any mortgage agreement, you must carefully look at the interest rates in the agreement.
Such clauses may completely go against the interest of the mortgagor as it gives power to the mortgagee to alter the clauses of the agreements in the event of the default of the party.
This clause allows the mortgagor to lease the mortgaged property with the prior permission of the mortgagee. This clause is beneficial for the mortgagor.
You must check carefully whether you have to give the possession of the property to the mortgagee or not. Sometimes this clause creates legal issues if not read properly as there can be loopholes in this clause.
It is imperative to understand the terms and conditions of a contract you are entering into. Legal professionals may make mistakes while drafting a mortgage deed, but you need to make sure that you won’t suffer from the common issues only because of negligence. There are some essential clauses in the deed which can create a lot of problems for you if not read correctly. That is why the understanding of these important clauses is necessary. I hope this article has helped you and made you understand about the Mortgage, the mortgage deed and some important clauses which are the backbone of the whole deed of Mortgage.
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