KNOWLEDGE - TYPE OF MORTGAGES

What is Mortgage

Mortgage refers to hypothecation of a property to a bank or housing finance company (HFC). This is done as a security for a loan. A usual form of security which banks insist on is mortgage of the property for which the loan is being availed of by the borrower . The transferor is called a mortgagor, the transferee a mortgagee. The principal money and interest, payment of which is secured is called the mortgage money, and the instrument by which the transfer is effected is called a mortgage deed. 

Under the Transfer of Property Act, Section 58 defines mortgage as 'the transfer of an interest in specific immoveable property for the purpose of securing payment of money advanced as loan, or the performance of an engagement which may give rise to a pecuniary liability'. 

Mortgage of property gives the lender a right to acquire and sell the property in case of default by the borrower in repayment of either the loan amount or other dues in accordance with the agreed terms and conditions. It creates a legally-binding contract between the parties. The execution of the mortgage documentation is done simultaneously with the loan documentation . The bank has the first right on the property against which it provides a loan. In case there are more than one lenders, a pari passu charge is created in favour of all the lenders. 

Types of mortgages

Ø  Simple Mortgage

Ø  English Mortage

Ø  Usufructuary mortgage 

Ø  Mortgage by deposit of title deeds 

Ø  Mortgage by conditional sale 

Ø  Anomalous mortgage 

Ø  Reverse Mortgage

Simple mortgage 

In case of a simple mortgage, the possession of the mortgaged property is not delivered to the mortgagee. The mortgagor binds himself personally to pay the mortgage money and agrees that in the event of his failing to pay according to his contract, the mortgagee will have a right to sell the mortgaged property and the proceeds of sale will be used to pay the mortgage money. 

English mortgage 

In case of an English mortgage, the mortgagor binds himself to repay the mortgage money on a certain date and transfers the mortgaged property absolutely to the mortgagee. This is subject to the condition that he will re-transfer it to the mortgagor upon payment of the mortgage money as agreed. 

Usufructuary mortgage 

In case of an usufructuary mortgage, the mortgagor delivers possession, or expressly or by implication binds himself to deliver possession, of the mortgaged property to the mortgagee. He further authorises him to retain such possession until payment of the mortgage money. The mortgagee is also authorised to receive the rent and profits accruing from the property and to appropriate them in lieu of interest or in payment of the mortgage money. No such transaction will be deemed to be a mortgage, unless the condition is embodied in the document which effects the sale.

Mortgage by deposit of title deeds 

In this kind of mortgage, the borrower delivers to a creditor or his agent, documents of title to immovable property, with intent to create a security thereon. No stamp duty is payable in such cases.

Mortgage by conditional sale 

In case of mortgage by conditional sale, the mortgagor ostensibly sells the mortgaged property on the condition that either on default of payment of the mortgage money by a certain date the sale will become absolute, or that on payment being made the sale will become void. 

Anomalous mortgage 

A mortgage which is not a simple mortgage, a mortgage by conditional sale, a usufructuary mortgage, an English mortgage or a mortgage by deposit of title deeds, is called an anomalous mortgage. 

Reverse Mortgage

In 2007, the finance minister of India introduced a concept well-known and widely accepted in the West: Reverse Mortgage.

Reverse Mortgage: What is it?

A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. Reverse mortgage, as its name suggests, is exactly opposite of a typical mortgage, such as a home loan.

How does it work?

In a typical mortgage, you borrow money in lump sum right at the beginning and then pay it back over a period of time using Equated Monthly Instalments (EMIs).

In reverse mortgage, you pledge a property you already own (with no existing loan outstanding against it). The bank, in turn, gives you a series of cash-flows for a fixed tenure. These can be thought of as reverse EMIs.

The specific format National Housing Board (the facilitator for housing finance in India) is promoting is one in which, the tenure is 15 years and the owner of the house and his/her spouse continue to live in the house till their death -- which can occur later than the tenure of the reverse mortgage.

Simply put, any senior citizen, opting for reverse mortgage will get annuity (the reverse EMI) from the bank for 15 years. After that, the annuity payments stop. However, they can continue to live in the house.

What are the features of this loan?

The draft guidelines of reverse mortgage in India prepared by the Reserve Bank of India have the following features:

Any house owner over 60 years of age is eligible for a reverse mortgage.

The maximum loan is up to 60 per cent of the value of the residential property.

The maximum period of property mortgage is 15 years with a bank or HFC (housing finance company).

The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.

The revaluation of the property has to be undertaken by the bank or HFC once every 5 years.

The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.

Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

How is the loan paid?

With a reverse home mortgage, no payments are made during the life of the borrower(s). Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time.

In most areas where appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.

When the last borrower passes, or it is decided to sell the home and move, the loan becomes due. The ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries.

The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remaining equity of the home.

What happens after the death of one or both of the spouses?

If one of the spouses dies, the other can still continue living in the house. If both die, the bank will give their heirs two options -- settle the overall outstanding loan and retain the house, or the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs.

How much of an annuity income can my house generate using reverse mortgage?

The banks have so far not indicated the interest rates. However, we can safely assume that it will not exceed the interest rates used for loan against property -- which is currently in the region of 12 per cent to 14 per cent.

What is a loan to value ratio?

Loan to value ratio means the percentage of loan that you will get for the value of the property that you pledge. The typical rate loan to value ratio is 60 per cent.

So, for e.g., if you pledge a property worth Rs 60 lakh (Rs 6 million), then the loan amount that you can get is Rs 36 lakh (Rs 3.6 million).

Does a person's age affect the amount of annuity paid?

It certainly does. Higher the age, higher the annuity! Everything else remains the same.

Why is this scheme not popular?

Recent reports seem to indicate that a very small percentage of senior citizens only seem to have taken advantage of the facility since its inception. This could be perhaps because better awareness had not been created about the product.

Secondly, the Indian banking industry caps the available loan amount at Rs 50 lakh (Rs 5 million), instead of providing for an equitable percentage of the property's value, and limits the loan period to a tenure of 15 years.

The product is still evolving and may take on new dimensions depending on how the banks wish to present its consumer appeal.