Home loan is one of the most common terms that home buyers come across while buying a property in India. When you buy a house, you can either make a down payment to take a home loan to make the payment. When you take a home loan, most of the time, the financial institution or bank mortgages your real estate.
This simply means that they are in complete possession of your property until you repay the loan amount with interest. In case you fail to make the repayment, the bank or financial institution can auction your property off to a third party.
Despite the complicated definition, most of us have heard the term mortgage. But only a few of us know the terms Registered Mortgage and Equitable Mortgage. So, before we move to the key differences between the two, let us understand the meaning of the two types of mortgages on home loans in India.
Meaning of Registered Mortgage on Home Loan
A Registered Mortgage, often called a deed of trust, is a kind of financing arrangement under which the home loan borrower voluntarily gives the lender complete ownership of the real estate if they default on their home loan. You must know that once the borrower decides to choose a Registered Mortgage, the necessary approvals from the sub-registrar's office are required to reach the agreement.
Simply put, in Registered Mortgage on a home loan, it is important to take the sub-registrar's approval to finalise the agreement. Thus, the mortgagor and the mortgagee agree to abide by a set of terms and conditions for the home loan tenure set by a third party.
Working of Registered Mortgage
In order to reach the agreement of a registered mortgage loan, you must initially create a charge on your house or the property to be mortgaged with the sub-registrar. The charge under this financing option is created through a complete formal procedure. Here, the records serve as proof of interest transfer to the banks and financial institutions as security.
Since registration is compulsory under the Registered Mortgage scheme, the agreement duly meets all the legal requirements for creating a charge. When you pay back your debt in full, the real estate title is immediately restored to you and the lender loses all rights and authority to your property. However, in case of default, the lender can seize your property and sell or use it as they find appropriate.
Meaning of Equitable Mortgage on Home Loan
In the term "Equitable Mortgage", the word Equitable is derived from "Equity", which means in the interest of justice. An Equitable mortgage is a type of mortgage where the terms and conditions of the agreement are made solely between the mortgagee and the mortgagor. This means that there is no government agency or third party involved.
In other words, we can say that an Equitable mortgage is a financing arrangement under which the borrower and the bank or financial institution mutually decide on the terms and conditions of the mortgage loan. And the third-party refrains from involvement.
Working on Equitable Mortgage
Since this financing option is not so popular, many wonder how to create one. Under this kind of loan, the borrower willingly transfers the property title deed to the lender. This results in creating a charge based on mutual agreement rather than registration. If the borrower fails to repay the dues, the lenders have the absolute right to auction the mortgaged property and recover its losses.
Registered Mortgage Vs Equitable Mortgage- Key Differences
Since both Registered Mortgage and Equitable Mortgage seem to be similar, it's easy to confuse the two. Here, we will look at key differences between them based on multiple parameters.
1. Process
To initiate the Registered Mortgage process, the borrower must contact the sub-registrar's office. Whereas in the case of Equitable Mortgage, it is compulsory to purchase a stamp paper.
2. Registration
Under Registered Mortgage, registration is compulsory. On the other hand, Equitable Mortgage does not need any registration.
3. Affordability
In terms of affordability, Registered Mortgages are slightly more expensive in comparison to Equitable Mortgages. This signifies that an Equitable Mortgage is less expensive than Registered Mortgage.
4. Cost Involved
To obtain a Registered Mortgage, you need to spend 5% of the value of your house. In contrast, under Equitable Mortgage, the cost of stamp duty is either 0.1% or 0.2% of your home value.
5. Rights of Lender
In the event of default under Registered Mortgage, your mortgaged real estate is transferred to the bank, and they have the right to do whatever they wish with the property. They can either sell it or use it. On the other hand, in case of default under Equitable Mortgage, the financial institution takes over the mortgaged property and auctions it to recover the losses.
6. Risk Involved
Since a Registered Mortgage offers security to both lenders and borrowers, it is considered risk free. On the contrary, an Equitable Mortgage involves higher risk.
Now that you are pretty familiar with both Registered and Equitable Mortgages, deciding between them should not be tedious. You can consider financial institutions' preferences and risk factors while choosing between the two. But in the long run, a Registered Mortgage is always preferred over and above an Equitable Mortgage because it benefits both the lender and the borrower. If you still have any doubts, drop a comment below, and we will answer your questions.