What Is An English Mortgage?

In the wide world of loans and mortgages, it is quite normal to lose your way. However, without a clear understanding of these financial-world jargons, you journey to acquire some liquidity may not be all smooth. When applying for a mortgage, you would come across the type, English Mortgage.

MakaanIQ decodes this mortgage type and how it is different from others:  

What is mortgage?

When you use your movable or immovable assets to apply for a loan, it is known as mortgage. Mortgage is a means that helps you unlock an otherwise locked liquidity. One among the various types of mortgages is English Mortgage. While Chapter IV of The Transfer of Property Act, 1882, talks about Mortgage of Immovable Property and Charges, Section 58 (e) of the Act defines English Mortgage. 

Under an English Mortgage scheme, the lender is entitled to take possession of the mortgaged property if the borrower defaults on payment. The lender may also proceed to sell the property without any judicial intervention. In other forms of mortgage, the lender needs to produce a court order even for the possession of the property. Section 69 of the Transfer of Property Act, 1882, grants the power of sale to the lender or any person acting on his behalf. Section 69 also lays down some conditions that have to be met to enable the lender to sell the mortgaged property.

Considered the safest form of mortgage, English Mortgage is preferred by financial institutions.

Key features of English Mortgage

• The borrower binds himself to return the loan amount on a specific future date.
• The mortgaged property is transferred absolutely to the lender.
• The lender has to re-transfer the mortgaged property to the borrower on payment of the loan amount.
• While possession rights remain with the lender in an English Mortgage, the borrower may be allowed to occupy the property himself or give it on rent. 

The documentation

Along with a loan agreement, you also have to get a mortgage deed made for an English Mortgage. If there are more than one lender, all of them can claim their proportionate share in the property, if the need arises. Also, the mortgage deed forms a part of the loan process and is not a stand-alone document. The terms and conditions of the mortgage deed can be according to specific needs and requirements of the contracting parties.

The drawbacks

When compared with other types of mortgages, costs involved in an English Mortgage scheme are higher. In an English Mortgage, a property is transferred in the name of the lender first, and then in the name of the borrower, when he repays the loan amount. Due to this, the stamp duty and the registration charges are required to be paid twice. This ultimately increases the cost of borrowing for the borrower.

The SARFAESI Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, empowers financial institutions to recover their non-performing assets without any judicial intervention. This gives banks the right to recover pending dues from properties that may have turned non-performing. Loans that have turned bad can be recovered by an asset-reconstruction company.

However, SARFAESI is applicable only on secured loans. The lender has to send a notice to the borrower before initiating the sale of a property. A borrower has the option of approaching the Debt Recovery Tribunal (DRT) or Debt Recovery Appellate Tribunal (DRAT) in case he thinks there are discrepancies in the process.