Legal and equitable mortgage: on the basis of transfer of title to the mortgaged property, mortgages are divided into types namely:
- Legal Mortgage
- Equitable Mortgage
In a legal mortgage, the legal title to the property is transferred in favor of mortgagee by a deed.
The deed is to be registered when the principal money is Rs.100 or more.
On repayment of the loan, the legal title is retransferred to the mortgagor.
The method of creating charge is expensive as it involves registration charges and stamp duty.
An equitable mortgage is affected by delivery of documents of title to property to the mortgagee.
The mortgagor through Memorandum of deposit undertakes to grant a legal mortgage if he fails to pay the mortgage money.
- No registration is required in equitable mortgage and so stamp duty is saved.
- It involves minimum formalities.
- The information regarding such mortgage is kept confidential between the lender and borrower. So the reputation to the borrower is not affected.
- If the mortgagor fails to repay, the mortgagee must get a decree for the sale of the property. Getting a decree is expensive and time consuming.
- The borrower may hold the title deeds not on his own account, but in the capacity of a trustee.If an equitable charge is created, the claim of the beneficiary under the trust will prevail over equitable mortgage.
- There is the risk of subsequent legal mortgage in favor of another party.If the equitable mortgagee parts with the security, even for a short period, the debtor may create a second legal mortgage over the same property.