Mortgage vs Hypothecation – Key Differences : Mortgage and Hypothecation, both are used to secure the loan or advance by creating charge on underlying assets. These two terms are similar in terms of ownership or possession of asset which lies with the borrower in both the cases. However, they differ in nature of asset on which charge is created by way or mortgage or hypothecation.
When a charge is created on movable asset, it is said to be hypothecated and the process is known as Hypothecation. Whereas a charge created on immovable asset is known as mortgage.
Here the term ‘Charge’ mean the right created by any person (borrower) over its assets, in favour of bank or financial institution, to get the loan or advance. Thus, charge so created restricts the borrower to sell the asset or transfer the ownership to any other person. There are various types of charge created on asset which are Assignment, Mortgage, Lien, Pledge, Hypothecation etc. In our last article, we discussed about mortgage and different types of mortgage transactions. Here we will know about the difference between mortgage and hypothecation.
Mortgage vs Hypothecation
Mortgage is defined under section 58 of transfer of property act, 1882. Section 58 define mortgage as “A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.”
Under mortgage process, The person who transfer his property i.e, Transferor is called a mortgagor. The person to whom the property is being transferred i.e, Transferee is called mortgagee. The principal money and interest amount payment of which is secured for the time being are called the mortgage money. The legal document or instrument by which the transfer is effected is called the mortgage deed.
In case mortgagor fail to pay the debt or mortgage money within the stipulated time period, the mortgagee has the right to sell the assets and appropriate the amount in lieu of interest or principal or both.
There are different types of mortgage – simple mortgage, mortgage by conditional sale, usufractuary mortgage, English mortgage, mortgage by deposit of title deeds, anomalous mortgage. These are already discussed in detail in previous article.
Hypothecation is defined under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. SARFAESI Act define hypothecation as “a charge in or upon any movable property, existing or future, created by a borrower in favor of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance, and includes floating and crystallization into fixed charge on movable property.”
Lender is known as hypothecate and borrower is considered as hypothecator. In case, borrower fails to repay the debt within the stipulated time period, the lender bank or financial institution would have the option to recover its dues by way of sale of hypothecated asset.
Example – In case of car loan, vehicle remain with the borrower but the same is hypothecated to the bank / lender. In case the borrower defaults, bank take possession of the car after giving due notice and sell the same and appropriating the sale proceeds to the loan account.
Other example of hypothecation is loan against stock and debtors. Goods or stock is hypothecated by the bank. In case borrower fails to repay, bank can convert hypothecation into pledge and take over possession of goods or stock for debt recovery process.
Key Difference between Mortgage and Hypothecation
|In Mortgage, the title of the property passes from the owner to the lender, as collateral for the amount borrowed.
|Whereas in Hypothecation, a person borrows money from the bank by collateralizing an asset, without transferring title and possession.
|Mortgage is a charge against immovable asset or property.
|Hypothecation is a charge created against movable asset or property.
|In mortgage, there is transfer of interest in the asset.
|Hypothecation is a security for payment of an amount.
|Possession of asset remain with the borrower, but not always.
|Possession usually remain with the borrower.
|In case of mortgage, the amount of loan is comparatively high
|In case of hypothecation, loan amount is comparatively lower.
|As loan amount is higher, tenor is also higher
|As loan amount is lower, tenor is also lower
|Mortgage deed is the legal instrument for executing mortgage.
|Hypothecation agreement is the legal instrument in this case
These two forms of charge also have some similarities like both provides security to the loan and possession of the asset remain with the borrower. In both form of charge, if borrower fails to repay the debt, lender can recover the amount by selling the asset.