Everything about unregistered mortgage

In the world of intricate real estate transactions, mortgage registration has become critical to ensuring the safety and interest of both the lender and the borrower. As a result, there is also an agreement that does not require any paperwork or stamps, as is required in a registered mortgage. This type of agreement is considered a high-risk agreement by both the lender and the borrower, and it can cause significant problems for both parties. There are numerous frauds associated with this unregistered agreement. These are referred to as unregistered mortgages. Learn more about it below. 

See also: What is mortgage?

 

What is an unregistered mortgage?

Unregistered mortgages, also known as equitable mortgages, are loan agreements made by the lender and borrower that are not legally registered in the property’s title deed.  They are not even registered with local authorities. In India, equitable mortgages are governed by the Transfer of Property Act of 1882 and the Registration Act of 1908. According to the law, legal authorities must register all deeds with proper paperwork. It is solely based on informal agreements and does not require a mortgage deed. Unregistered mortgages can raise a number of legal and practical issues for both lenders and borrowers.

 

Reasons for unregistered mortgage

There are several common reasons for unregistered mortgages. It could be due to a lack of awareness of legal requirements, as the entire process of getting a mortgage registered is quite complicated. The second reason is that it usually takes two to four weeks to register a mortgage, whereas putting security as collateral without registering is a faster and more immediate way to sanction the loan. Third, there may be uncertainties in property transactions and potential difficulties in enforcing mortgage terms.  Financial constraints can also be considered as a reason. In some cases, borrowers or lenders may face financial constraints or time constraints that prevent them from completing the mortgage registration process. 

This is relevant when short-term borrowing is involved. These could also be administrative reasons, such as technological limitations or inefficiencies in the registration system. Unexpected circumstances, such as personnel changes, unanticipated events, or emergencies, can disrupt the registration process. Sometimes parties refuse to put collateral on paper. This can occur when parties want to keep their transaction private and hidden from the government in order to avoid certain legal issues and questionable practices. 

 

Risks and challenges associated with unregistered mortgages

 

More fragile claim to the property

Because this mortgage is not legally registered, the government considers it to be non-existent. If a borrower defaults on the loan and the property is sold, the holder of the unregistered mortgage will not be paid as long as all registered claims have been satisfied. In the most dire situation, the unregistered mortgage holder could miss out on anything at all.

Market perception

When a mortgage is unregistered, there is a high risk that market participants will lose credibility and trust in the property. Unregistration can raise doubts and questions about legal records. The overall real estate market can be affected, resulting in a decrease in property value. 

Tax implications

Because this property does not exist on paper, it can cause numerous complications for both the lender and the borrower. There are specific tax implications for unregistered mortgages. It is recommended that you consult with a tax advisor to help you navigate the process. 

Enforcement challenges

It may be more difficult to enforce an unregistered mortgage than a registered one. This is due to the possibility that proving the agreement’s existence and terms in court will be challenging. Furthermore, resolving a dispute with a borrower who contests the agreement’s validity may be costly and time-consuming.

Limited ways to solve problems

There are fewer solutions available for problems that arise in the absence of proper registration. It seems as though there are obstacles that can prevent taking successful legal action to settle disagreements.

 

Advantages of unregistered mortgage

 

Lower cost

An unregistered mortgage requires less documentation and legal fees than a registered mortgage. One may skip stamp duty and other legal fees, and this leads to lower-value loans that benefit the borrower. This can help them save a lot of cash. on the upfront costs.

Lower interest rates

Unregistered mortgages may be associated with lower interest rates due to a variety of factors. Because this is a quick process, borrowers are prepared to keep their collateral for their property in the event of an emergency at a low interest rate. Due to time constraints, they feel compelled to provide that rate.

More flexible and fast

Compared to a registered mortgage, the entire process is faster and less complex. This provides borrowers looking for short-term loans and in need of immediate cash with an excellent reason to choose this procedure. Unregistered mortgages allow for more flexible interest rates and repayment schedules, allowing borrowers and lenders to reach customised agreements.

Customised agreements

Both parties involved in the transaction have the freedom to customise it as needed at any time and from any location, without incurring any fees or complexities associated with the registration process. They are not required to follow a strict standard registration format as specified by law. There may also be additional rules that are not registered but can be included in an equitable mortgage.

More privacy

Unregistered mortgages provide more privacy for both borrowers and lenders. For example, if anyone prefers to keep their financial transactions private, an unregistered mortgage allows them to do so because the information is not publicly available. Both the lender and the borrower may be unwilling to disclose information that is not legally valid and could be questioned by authorities. Unregistered mortgages enable them to conceal the same.

Read also: All about mortgage deed and its importance

 

Process of preparation of deed

Note: Please keep in mind that this is not intended to be professional legal advice. The process varies depending on location. This procedure will walk you through the general process of an unregistered mortgage deed.

First, the loan amount, interest rate, terms of repayment and security (the property being mortgaged) are agreed upon by the borrower and the lender. Oral agreements may also be enforceable in some jurisdictions, but this agreement can be formalised in a written deed. It is strongly advised to obtain legal counsel to guarantee that the agreement is precise, all-inclusive, and safeguards the interests of both sides. 

The property may be independently valued to ascertain its fair market value and suitability as collateral. Both the borrower and the lender must sign the mortgage agreement deed, usually in front of witnesses. Certain formalities, such as notarisation or stamp duty payment, may be necessary depending on the jurisdiction.

As extra security during the loan term, the lender can sometimes acquire physical possession of the mortgaged property. It can be difficult and costly to enforce an unregistered mortgage if the borrower defaults on the loan. It might be necessary to present witness testimony or other evidence in court to support the agreement. Compared to registered claims against the property, the unregistered mortgage might have a weaker claim. 

Prior to entering into any such agreement, it is crucial that you speak with a lawyer who specialises in property and mortgage law.

FAQs

How can the risks associated with unregistered mortgages be reduced?

Prevention measures consist of doing accurate research, seeking legal advice, ensuring open communication between parties and being familiar with the legal and regulatory effects of unregistered mortgages.

Are unregistered mortgages right for informal agreements between family members or close friends?

Yes, unregistered mortgages may be a better fit for informal arrangements, especially those between parties with already-established connections in which trust is important.

Can unregistered mortgages be converted to registered mortgages at a later date?

The ability to convert an unregistered mortgage to a registered one at a later date is determined by a number of factors, including your jurisdiction's specific laws and regulations, as well as the terms of the original unregistered mortgage agreement. In some cases, a court order may be required to compel the borrower to register the mortgage. This could occur if the original agreement is unclear or the borrower refuses to cooperate with the registration process.

Can unregistered mortgages be used for commercial properties, or are they more commonly associated with residential properties?

Yes, it is suitable for both. However, their use is far less common because commercial real estate transactions typically involve larger sums of money and higher stakes. Due to the increased risk and complexity, lenders typically prefer the security and clarity provided by registered mortgages for commercial properties.

Can technology, such as blockchain, play a role in addressing some of the challenges associated with unregistered mortgages?

Yes, blockchain technology has the potential to solve some of the problems associated with unregistered mortgages, but there are some limitations and obstacles to overcome. This can help to reduce fraud risks and create a clear audit trail for unregistered mortgages. Verifying the existence and terms of an unregistered mortgage may be easier and faster with blockchain-based records.

Is there a difference in the level of legal protection offered to lenders and borrowers in unregistered mortgages compared to registered ones?

Yes, the legal protections may be more limited in unregistered mortgages.

How do unregistered mortgages affect the ability to sell a property?

Unregistered mortgages can make real estate transactions more difficult, which may cause buyers to hesitate and affect the property's marketability.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com