What is an equitable mortgage?
An equitable mortgage differs slightly from a standard registered mortgage which is commonly used to purchase property.
In this short article, you'll find the answer to 'What is an equitable mortgage?'.
Overview of standard registered mortgages
The traditional and most common method of securing a property is through a registered mortgage.
As an example of the standard route; An individual intends to purchase a home worth £100,000.
They secure a registered mortgage of £70,000 from a lender and will then make repayments each month to either pay off the total sum or the interest only.
If the individual were unable to make the monthly repayments, the mortgage deeds will state that the lender (or bank) were to sell the property.
In the UK, this is known as "mortgage repossession" and in the USA is known as foreclosure.
Equitable mortgage definition
In the most basic sense, an equitable mortgage is a standard registered mortgage document which has sections incomplete or missing.
This could be anything from a signature on the wrong line to a complete missing section of the document.
For this reason, equitable mortgages aren't entirely valid agreements.
The difference between registered and equitable mortgages
With a standard mortgage, once the agreement has been registered, the titles of the property are in your name and are legally registered to government databases.
Conversely with an equitable mortgage, the property titles are not actually transferred to your name but are instead held in escrow until court action is taken.
If taken to court, it will be found that the agreement had the intention of a complete agreement and will thus be treated as a standard legal mortgage.
In both cases, the lender has the right to repossess (or foreclose) the property.
What is an equitable charge?
An equitable charge is written within the mortgage agreement and states that the lender does not gain ownership of the asset (property) in the case of non-payment, however they are granted rights to recovering the total mortgage amount.
The usual method for a lender to recover the mortgage amount is through foreclosure or repossession.
Other information on equitable mortgages
In the UK, equitable mortgages are usually not created on purpose.
However, in some countries, equitable mortgages are actually a secondary loan option.
Equitable mortgages are faster to process and are overall cheaper than registered mortgages.
This is due to no legal documents being registered with the sub-registrar of a change of ownership.
Instead, borrowers have an agreement with the bank/lender;
Lenders will offer the funds to purchase a property to a borrower, who agrees that the property is to be used as security against the loan.
Fees can be as low as 0.1% for equitable mortgages.
An equitable mortgage is also sometimes referred to as an implied mortgage. If a dispute over payments is taken to court, it will be treated the same as a registered mortgage.
A word of caution
If you live in an area where equitable mortgages are an option, when purchasing a property you should be completely sure that there are no outstanding loans left on the property;
Equitable mortgages lack in registration documents and therefore in many cases only the lender and current owner may be aware of the agreement, leaving a new buyer to purchase a property with an outstanding loan.