Equitable mortgage has been a practical choice of collateral to take loans against over the years. When it comes to the agricultural sector, using their agricultural land as a collateral helps people obtain funds for investing in the further development of their farms and meeting general financial needs. While equitable mortgage on agricultural land is a highly common practice, there are several intricacies involved in the process that need to be taken into consideration. This article will help you navigate through the basics of using agricultural land as an equitable mortgage and its implications to help you decide if it is a good solution for your needs.
See also: How is registered mortgage different from equitable mortgage?
What does it mean for the stakeholders?
Equitable mortgage on agricultural land can imply several things for the borrowing and the lending parties. Following are the major ones you should keep in mind before going for this option:
For borrowers
- Access to capital: The borrower obtains much-needed capital for agricultural activities that they can employ for the development of infrastructure, technology or other operational needs.
- Risk of foreclosure: In case of failure of meeting repayment obligations, the borrower may face foreclosure, leading to loss of agricultural land being used as collateral. This might have more serious consequences for those whose livelihoods completely depend on the agricultural land.
- Financial flexibility: The funds obtained against the agricultural land can be used flexibly according to the needs of the borrower. It is up to the borrower whether to use the funds for immediate financial needs or long-term investment purposes.
- Market value considerations: If the value of the land appreciates over time, the borrower is sure to benefit from it by selling or refinancing the property at a higher value at a later date.
- Environmental compliance: To avoid penalties and legal complications, it is mandatory for borrowers to comply with environmental regulations. Failure to do so might result in complications that adversely impact agricultural operations.
For lenders
- Security for the loan: The mortgaged piece of land serves as a collateral for the lender for security purposes. Should the borrower default in repayment, the lender can sell the property to recover the outstanding debt.
- Market risks: Since the value of land is subject to market conditions, the value of the collateral can fluctuate. Economic downturns or turbulent conditions in the agricultural sector can affect the collateral’s value in several ways.
- Legal procedures: In case of foreclosure, the lender is required to follow the applicable law and regulations. These procedures come with a baggage of time, costs and complications.
- Due diligence: Thorough due diligence is necessary before accepting the collateral. It is advisable for the lender to assess the borrower’s creditworthiness, the condition of the land and potential associated risks.
- Interest rate and terms: The interest rate and terms established by the lender must be in congruence with the borrower’s creditworthiness and financial condition. Terms that are unfavourable to the borrower increase the risk of default.
- Regulatory compliance: Lenders are required to comply with the lending regulations associated with agricultural loans. Failure to do so may result in legal consequences.
- Mitigating environmental risks: Once the land is mortgaged, it is the responsibility of the lender to ensure that the borrower complies with the environmental sustainability regulations while farming.
Pros and cons of equitable mortgage on agricultural land
Now that you are aware of the implications on equitable mortgage on agricultural land, let us have a look at the pros and cons of this practice to help you make a more informed decision:
| Pros | Cons |
| Access to capital: The funds obtained can be used for the development of agricultural infrastructure to enhance the overall productivity and efficiency of the farm. | Risk of foreclosure: In case of default in repayment, the lender holds full right to foreclose the agricultural land, thereby leading to the loss of property and an important means of livelihood for the borrower. |
| Lower interest rates: Providing a security ensures lower interest rates than unsecured loans, making it a more affordable and appealing financing option for the borrower. | Market volatility: Since the value of the agricultural land is determined by market forces, it is subject to fluctuations, leading to challenges in future sale prospects. |
| Flexibility: Borrowers can use the funds as per their discretion, making it a versatile option for a host of financing needs. | Environmental and regulatory risks: Violations of the regulations that are in place to ensure the sustainability of agricultural practices can result in legal complications with consequences for both the parties. |
| Longer repayment periods: The repayment period for agricultural loans aligns with the cyclical nature of the occupation, allowing the borrower enough time to generate income before having to face repayment obligations. | Interest rate and repayment risks: Unfavourable terms of repayment, such as high interest rates, might become a financial strain for the borrower, resulting in increased chances of default in repayment. |
| Appreciation potential: Subject to market conditions, the value of collateral may increase, thereby generating scope for refinancing or selling of the land in future. | Limited credit access: Defaulting in repayment will result in the loss of property, which might also reflect on the borrower’s credit score, causing difficulty in obtaining credit in the future. |
| Diversification of income sources: The borrower can expand the range of his agricultural activities with the help of the funds, such as exploring new crops or livestock. | Dependency on agriculture: For individuals dependent on agriculture for occupational purposes, using agricultural land as collateral makes their livelihood a subject to the volatile market forces. |
| Preservation of ownership: Unlike traditional mortgages, this setup does not involve the full transfer of the ownership of the collateral to the lender, thereby allowing the borrower to continue managing and utilising the resources for occupational purposes. | Legal complexity: Legal fees, stress and long-drawn procedures are inevitable in the process of foreclosure and might cause immense emotional and financial burden on the lender. |
| Support for rural development: The funds obtained through this setting helps sustain local economies, facilitates employment opportunities in rural areas and promotes growth and stability in the agricultural community. | Non-agricultural use restrictions: Some loans might have specific terms to limit the use of land for non-agricultural purposes, thereby affecting the flexibility of land utility for the borrower. |
FAQs
What does equitable mortgage on agricultural land mean?
A financial arrangement where the borrower receives a loan against their agricultural land while retaining the ownership of the land for occupational purposes, while also granting the lender a security interest refers to equitable mortgage on agricultural land.
How does foreclosure work in the case of equitable mortgage on agricultural land?
In case of default in repayment, the lender can seize the agricultural land to recover outstanding debts and the borrower loses the ownership of the land.
What are the advantages of using agricultural land as collateral?
Gain of capital for farming activities, lower interest rates and flexible utilisation of funds are some advantages of using agricultural land as collateral.
What are the risks posed to the borrower in an equitable mortgage on agricultural land?
Loss of property through foreclosure, market fluctuations and changes in regulations might pose risks to the borrower in such a setting.
How do lenders assess the value of agricultural land for mortgage purposes?
Lenders conduct a thorough appraisal of the land by considering the location, soil quality, crop yield history and market trends to determine the loan terms.
Can the borrowed funds be used for other purposes?
Borrowers can use the funds obtained against agricultural land for various purposes, such as purchasing equipment, expanding the farm or addressing personal needs.
Are there any restrictions on using agricultural land for non-agricultural purposes?
There might be local regulations in place that restrict the use of agricultural land for other purposes and non-compliance with these regulations can impact the terms of the mortgage.
| 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 [email protected] |
Riddhi Chatterji is currently pursuing a master’s degree in English literature from University of Delhi. Her meticulous attention to detail and the desire to make a learning experience out of every opportunity has allowed her to work with different forms of textual content for digital platforms, ranging from social media to news desks. When not working or studying , you can find her with her head buried in a book, discovering new music and movies, or out and about exploring the city on the metro.
