Equitable Mortgage vs. Registered Mortgage: Know the Difference

Many people dream of owning a home, but only a few achieve it. However, with the readily available financing option with various financial institutions, purchasing a property is no more a herculean task. When you apply for a home loan, the lender keeps the charge of your property title. However, you can choose between an equitable mortgage and a registered mortgage. Confused? Don’t be. Today, in this article, we will focus on what each one means and the key differences between an equitable mortgage and a registered mortgage.
 

What is Equitable Mortgage?

Equitable mortgage comes from the term equity. In the context of financing, equity means in the interest of justice. Sometimes referred to as implied or constructive mortgage, the equitable mortgage is a type of financing arrangement under which the mortgagor (borrower) and the mortgagee (financial institution) mutually decide on the terms and conditions of the mortgage loan. Under such type of financing, the government body or any other third party refrains from involvement.

How Does Equitable Mortgage Work?

Since this financing option is not common, many wonder how to create an equitable mortgage. Under this type of loan, the borrower willingly transfers his or her property title deed to the lender, resulting in a creation of a charge that is based on mutual agreement rather than registration. If the borrower fails to repay their dues, the lender has the right to auction the mortgaged property and recover its losses. 
 

What is a Registered Mortgage?

A registered mortgage, sometimes called a deed of trust, is a type of financing arrangement under which the borrower voluntarily gives the lender total ownership of the property if he/she defaults on their loan. Once the borrower decides to opt for a registered mortgage, the necessary approvals from the office of the sub-registrar are necessary to reach the agreement.
 

How does Registered Mortgage Work?

To reach the agreement of a registered mortgage loan, you need to first create a charge on your home (property to be mortgaged) with the sub-registrar. The charge under this financing option is created through a formal paperwork process, and the records serve as proof of interest transfer to the financial institution as security. (Annexure Point No. 6))
 
Since registration is mandatory under the registered mortgage scheme, the agreement meets all of the legal requirements for establishing a charge. When you repay your debt in full, the property title is restored to you, and the lender loses all rights to your property. However, if you default on your loan, the lender can seize your property and use or sell it as they see fit.
 
Also Read: Quick Guide to Mortgage Loans

Equitable Mortgage vs. Registered Mortgage: Key Differences

Since it is easy to confuse between these two mortgage loans, today, we will look at the key differences between a registered mortgage and an equitable mortgage.
 

Parameters	Equitable Mortgage	Registered Mortgage
Registration	The equitable mortgage does not need any registration.	Registration is mandatory under the registered mortgage.
Process	It is mandatory to purchase a stamp paper under the equitable mortgage.	To initiate the registered mortgage process, you, as a borrower, need to contact the office of the sub-registrar.
Cost Involved	Under this mortgage, the cost of stamp duty is either 0.1% of your home value or 0.2%.	You need to spend 5% of your home value to obtain a registered mortgage.
Affordability	Compared to a registered mortgage, an equitable mortgage is less expensive.	Registered mortgages are slightly more expensive.
Lender's Rights	In the event of default, the financial institution takes over your mortgaged home and auctions it to recoup its loss.	In the event of default, your mortgaged property is transferred to the financial institution, and they have the right to do whatever they want to do with the property; they can either sell it or use it.
Risk	In comparison to a registered mortgage, an equitable mortgage possesses a higher risk.	Since a registered mortgage provides security to both borrowers and lenders, it is considered risk free.

  

Similarities Between the Two Mortgages

Equitable mortgages and registered mortgages have the following similarities:

• You pledge your property as collateral for the loan.
• Both types of mortgages require interest pay on the loan amount 
• Equitable mortgage and registered mortgage require original property document 
• Lender has the right to sue the borrower in order to recover the loan amount
• Key Factors to Consider When Choosing Between Registered and Equitable Mortgage

Why Banks & Other Financial Institutions Prefer Registered Mortgage?

Banks and financial institutions prefer registered mortgages over equitable ones due to better legal protection and ease of recovering outstanding loans.

• Banks and financial institutions prefer registered mortgages over equitable ones due to the lack of records in the sub-registrar's office.
• The absence of registration makes it difficult for lenders to establish their legal rights over the property in the case of an equitable mortgage.
• Without a legally recognized mortgage, lenders face challenges in recovering their outstanding loan amounts.
• A registered mortgage creates a public record of the mortgage and the loan terms, offering greater legal protection and security.
• The registration process involves thorough due diligence, ensuring the lender has a reliable asset to fall back on.

Types of Mortgage

Understanding different types of mortgages can help in choosing the right one for your financial needs. Here are the primary types:

1. Registered Mortgage: Legally recorded with the sub-registrar, providing public acknowledgment of the mortgage and ensuring higher legal protection.
2. Equitable Mortgage: Not registered but created by depositing title deeds with the lender; lacks public record but provides some security to lenders.
3. Fixed-Rate Mortgage: Features a fixed interest rate for the entire loan term, offering predictable monthly payments.
4. Variable-Rate Mortgage: Has an interest rate that fluctuates with market conditions, potentially offering lower initial rates but with variable payments.
5. Interest-Only Mortgage: Allows for payments that cover only interest for a set period, with principal payments starting afterward.
6. Reverse Mortgage: Available to seniors, allowing them to convert home equity into cash without monthly payments, with repayment due upon sale or death.
7. Balloon Mortgage: Involves small regular payments followed by a large final payment, known as a balloon payment, at the end of the term.

Which Type of Mortgage Is Better?

The decision of which type of mortgage is better - registered or equitable - depends on individual circumstances and needs. Registered mortgages offer greater legal protection and security for the lender, while equitable mortgages can be less expensive and more flexible. 

When choosing between a registered mortgage and an equitable mortgage, consider your financial situation, risk tolerance, and goals. If you are looking for a lower cost mortgage option and are comfortable with higher risk, an equitable mortgage may be the better choice. However, if you value legal protection, security, and lower risk, a registered mortgage may be a more suitable option. Ultimately, the decision of which type of mortgage is better depends on a variety of factors, and it is important to carefully consider your options before making a decision. 

Key Factors to Consider When Choosing Between Registered and Equitable Mortgage

Before you arrive at any decision, keep the below factors in mind:

1. Financial Institution's Preference

In the equitable mortgage vs. registered mortgage debate, remember that the lender always prefers the latter over the equitable mortgage. Register mortgage offers security to both parties involved in the transaction. Here are some of the reasons why lenders prefer registered mortgage loans.

• If there is any sort of dispute over the property, the lender will have more rights and power over the borrower.

• You, as a borrower, cannot sell your mortgaged property until you settle your dues in full. The reason being, your property is recorded in the files of the sub-registrar. 

• In the event of default, the ownership of the mortgaged property is transferred to the lender, and they can use or sell it as they see fit.

1. Risk Factor

Under the equitable mortgage, there is no legal binding over the loan agreement and is simply based on the mutual agreement of the parties involved. However, in a registered mortgage, both the lender and borrower are bound by certain legal provisions, making it a safer financing alternative. 
 
Also Read: 5 Crucial Points to Consider Before Taking a Home Mortgage

Advantages & Disadvantages of Equitable Mortgage

Here are some advantages and disadvantages of equitable mortgage:
 

Advantages	Disadvantages
Lower cost compared to registered mortgages	Higher risk for both borrower and lender
More flexible terms and conditions	No legal protection for lender in case of default
Quick and easy process	Limited documentation and record-keeping
Borrowers can access higher loan amounts	Limited transparency regarding terms and conditions of the loan

While equitable mortgages can be a lower-cost and more flexible option, they come with higher risk and less legal protection. It is important you carefully consider the advantages and disadvantages of an equitable mortgage before making a decision.

Advantages & Disadvantages of Registered Mortgage

In the table below are the advantages and disadvantages of registered mortgages:
 

Advantages	Disadvantages
Greater legal protection for the lender in case of unpaid loan amount	Higher cost compared to equitable mortgages
Lower risk for both borrower and lender	More rigid terms and conditions
Full documentation and record-keeping	Longer process with more paperwork
Transparency regarding terms and conditions of the loan	Borrowers may not be able to access as high loan amounts

You should weigh the advantages and disadvantages of mortgage before making a decision if you value legal protection, lower risk, and transparency.

Conclusion

Now that you are familiar with both of these mortgage alternatives, deciding between them should not be a difficult task. In the long run, a registered mortgage is always preferred over an equitable mortgage because it benefits both the borrower and the lender.

Frequently Asked Questions (FAQ)

1. How Is An Equitable Mortgage Formed?

A: The lender forms an equitable mortgage by depositing the title deeds of the borrower's immovable property, and retains this asset until the loan is fully repaid.

2. Who can do equitable mortgage in India?

A: The borrower creates an equitable mortgage by depositing the title deed of their immovable property with the lender. In this property owners and their legal representatives are involved.

3. When Do You Form a Registered Mortgage?

A: A registered mortgage is formed upon its registration with the sub-registrar's office, which ensures the legal validity and authenticity of the mortgage agreement.

4. Is an Equitable Mortgage Required to be Registered?

A: An equitable mortgage is not required to be registered.

5. What is the validity period of equitable mortgage?

A: In India, an equitable mortgage is valid for a period of 12 years, after which the borrower needs to renew it. 

6. What are some tips for making informed mortgage decisions in India?

A: Tips for informed mortgage decisions in India include comparing interest rates, understanding terms and conditions, and reviewing legal documentation.