Equitable Mortgage

An equitable mortgage, also known as a mortgage by deposit of title deeds, is a type of loan secured against property, where the borrower gives the lender the right to hold the property documents (title deeds) as collateral, without formally transferring the property ownership. It is a simple and quick way to raise funds compared to a formal or registered mortgage, which involves additional legal procedures and higher costs.

In an equitable mortgage, the borrower continues to have ownership and possession of the property but grants the lender a claim on the property until the loan is repaid.

Key Features of Equitable Mortgage:

1. No Formal Registration Required: Unlike a legal mortgage, an equitable mortgage does not require registration with the land or property registry, making the process faster and cheaper.
2. Property Title as Security: The borrower deposits the title deeds of their property with the lender as security for the loan.
3. Possession Retained: The borrower remains in possession of the property and continues to use it during the loan period.
4. Lower Costs: Since there is no need for formal registration, equitable mortgages involve lower processing fees and stamp duty compared to a registered mortgage.
5. Commonly Used in India: Equitable mortgages are widely used in India, particularly by banks and non-banking financial companies (NBFCs), as they offer a simple and flexible method for securing loans.

How an Equitable Mortgage Works:

When a borrower needs a loan, they can opt for an equitable mortgage by providing the lender with the title deeds of the property. In return, the lender grants the loan. While the property ownership remains with the borrower, the lender holds a lien over the property, meaning the property cannot be sold or transferred without the lender’s consent until the loan is repaid.

Once the loan is fully repaid, the lender returns the title deeds to the borrower, and the lien is released. If the borrower fails to repay the loan, the lender has the right to claim ownership of the property to recover the outstanding amount.

Steps Involved in an Equitable Mortgage:

1. Application for Loan: The borrower applies for a loan with a bank or NBFC.
2. Property Valuation: The lender assesses the value of the property to determine the loan amount that can be sanctioned.
3. Submission of Title Deeds: The borrower deposits the original title deeds of the property with the lender as collateral.
4. Loan Approval and Disbursement: Once the lender is satisfied with the property’s value and legal status, the loan is approved and disbursed.
5. Repayment: The borrower repays the loan over the agreed tenure.
6. Release of Title Deeds: After the loan is repaid, the lender returns the title deeds and removes the lien from the property.

Advantages of Equitable Mortgage:

1. Faster Loan Approval: Since no formal registration is required, the loan approval process is quicker compared to a registered mortgage.
2. Lower Costs: Borrowers save on stamp duty and registration charges, making equitable mortgages more cost-effective.
3. Flexibility: Equitable mortgages offer flexibility in loan repayment, allowing borrowers to manage their finances more efficiently.
4. No Transfer of Ownership: The borrower retains ownership and possession of the property throughout the loan period.

Disadvantages of Equitable Mortgage:

1. Risk of Losing Property: If the borrower defaults on the loan, the lender can claim the property, leading to a loss of ownership.
2. Limited Loan Amount: The loan amount is typically lower than that of a registered mortgage, as lenders may be more cautious in granting higher amounts.
3. Not Suitable for All Properties: Lenders may be reluctant to grant equitable mortgages for properties with disputed titles or legal issues.

Equitable Mortgage in India:

In India, equitable mortgages are a popular choice for borrowers looking for a quick and cost-effective way to secure a loan. Many banks and NBFCs offer loans against equitable mortgages, including home loans, business loans, and personal loans. Borrowers can pledge residential, commercial, or industrial properties as collateral.

Leading Banks and NBFCs Offering Equitable Mortgages:

1. State Bank of India (SBI): Offers loans against property with equitable mortgage options for both salaried and self-employed individuals.
2. HDFC Bank: Provides loans against residential and commercial properties through equitable mortgage, with flexible repayment options.
3. ICICI Bank: Offers loans against property for personal and business needs using equitable mortgage as collateral.
4. Punjab National Bank (PNB): Provides loans against property for various purposes, secured through equitable mortgage.
5. Bajaj Finserv: Provides loan against property (LAP) through equitable mortgage for individuals and businesses.
6. LIC Housing Finance: Offers mortgage loans secured through equitable mortgage, with attractive interest rates.

Legal Framework Governing Equitable Mortgages in India:

In India, equitable mortgages are governed by the Transfer of Property Act, 1882. Under Section 58(f) of the Act, an equitable mortgage is created when the borrower deposits the title deeds of their immovable property with the lender with the intention to secure a loan.

Tax Implications:

Interest paid on loans secured by an equitable mortgage can be claimed as a deduction under Section 24(b) of the Income Tax Act if the loan is taken for purchasing or constructing a house. For business purposes, interest on such loans can be claimed as a business expense.

Conclusion:

Equitable mortgages are a convenient and cost-effective way to raise funds by pledging property without transferring ownership. They offer several advantages, including quicker processing times and lower costs. However, borrowers must be cautious, as failure to repay the loan can result in losing the property. Always compare loan offers from different banks and NBFCs to choose the best option for your needs.