A mortgage is a loan sanctioned against an immovable asset, such as a house or a commercial property. It helps the borrower unlock the otherwise locked liquidity. While applying for a mortgage, you may come across its various types, one of which is English Mortgage.
English mortgage, as defined under Section 58 (e) of the Transfer of Property Act, 1882, is a scheme; wherein, the lender is entitled to take the possession of the mortgaged property in case the buyer defaults on payment. Moreover, the lender may also proceed to sell the property, sans any judicial intervention. Contrary to the English mortgage, the lender needs to obtain permission from the court to sell the property in all the other forms of mortgage. Considered to be the safest form of mortgage, an English mortgage is usually preferred by banks and other financial institutions.
What are the essential requisites of English mortgage?
There are four basic characteristics of an English mortgage:
- The borrower/the mortgagor binds himself to repay the loan on a specific date
- The mortgaged property is absolutely transferred to the lender/the mortgagee
- The absolute transfer is made subject to the condition that the lender will re-transfer the mortgaged property to the borrower upon payment of the loan amount.
- While the possession rights remain with the mortgagee, the mortgagor is allowed to either occupy the property himself or rent it out.
For an English mortgage, you need to have a copy of the loan agreement, along with the mortgage deed. In case there are more than one mortgagees/lenders, each one can claim their respective share in the property if the need arises. In such cases, all the mortgage deeds shall form a part of the loan process. However, the terms and conditions of the deeds can be according to specific requirements of the parties.
What are the drawbacks of an English mortgage?
Perhaps the biggest drawback of an English mortgage is the cost involved in the process. As compared to all the other types of mortgages, the costs involved in an English mortgage are higher. Moreover, due to the fact that the property is first transferred in the name of the lender, and then later on, in the name of the borrower; the stamp duty and registration charges are also to be paid twice. This eventually increases the borrowing cost for the mortgagor.
As apprised by Aradhana Bhansali, Partner, Rajani Associates, “Under an English mortgage, the Act allows the lender to sell the mortgaged property, without the intervention of court, if the power to sell is expressly embodied in the mortgage deed, which is generally beneficial to a mortgagee in commercial/ financial transactions. This advantage, therefore, makes English mortgage popular among the companies and government bodies in providing loans/working capital against immovable properties as collaterals. However, this privilege of the mortgagee to sell the property without the intervention of court comes with certain mandatory stipulations to be fulfilled rigorously by a mortgagee prior to the sale. Another drawback of an English mortgage is that it is applicable and confined to a select set of mortgagors and mortgagees in India.”
How is English Mortgage different from Usufructuary Mortgage?
One of the major differences between a Usufructuray mortgage and an English mortgage is that in the case of the former, the mortgagee cannot foreclose or sue for sale. Moreover, the mortgagee is entitled to receive the rents and profits arising out of the property, with respect to the interest or principal, or both.
What makes English mortgage popular?
As per Section 69 of the Transfer of Property Act, English mortgage allows for enforcement without intervention from the court in case of a payment default. Also, despite the fact that the transfer is done twice, the majority of State stamp laws have allowed an exemption for re-transfer in case of a mortgage. This means that the transaction need not be stamped twice, at the same rate.
Mortgage of the property provides the lender with a right to acquire and sell the property in case of default in repayment of either the loan amount or other dues. Therefore, the execution of mortgage documentation is done simultaneously with the loan documentation. In case there are more than one mortgagees, a pari passu charge (i.e. a charge which provides a right to share the specified assets of the borrower to all the lenders of the arrangement) is created in favour of all the lenders.