English Mortgage: All you need to know

[ecis2016.org] In this article, we examine what a mortgage is, the various types of mortgages and the facets of an English Mortgage

When you take a home loan, the same is secured by way of a mortgage. The Transfer of Property Act, 1882, defines a mortgage and enumerates various types of mortgages. Let us understand what a mortgage is, the various types of mortgages and the facets of an English Mortgage.

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English Mortgage meaning

An English Mortgage is defined under Section 58(e) of the Transfer of Property Act, 1882, as under:

“Where the mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage.”

From the definition, it becomes apparent that for all practical purposes the transaction is a proper sale, except that the mortgagor, which means the borrower, has to give a binding commitment to the lender that he will repay the money on a prefixed date. As the mortgagor is transferring the immovable property absolutely to the mortgagee, like a proper sale transaction, the transaction will be subject to applicable stamp duty on the market value of the property, on the date of execution of the documents of English mortgage. This document is required to be registered also as a sale deed, under the provisions of the Indian Registration Act, 1908.

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The sale agreement will have a covenant specifying the date when the monetary liability will be discharged by the mortgagor. The agreement also needs to have a promise on the part of the mortgagee to re-transfer the property to the original owner of the property, on receipt of the payment. On payment of the amount outstanding, with interest, on the future date as specified, the lender is under an obligation to re-transfer the property to the mortgagor.

In case the mortgagor fails to repay the money on the dates agreed upon, nothing is required of the mortgagee. The mortgagee simply becomes an absolutely owner, without any obligation to re-transfer the property to the borrower in future. He can deal with the property the way he wishes to.

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Difference between English mortgage and mortgage by conditional sale

Before we attempt to understand the difference between an English mortgage and a mortgage by conditional sale, let us look at the definition of a mortgage by conditional sale, which is contained in Section 58(c) of the Transfer of Property Act, 1882, as under:

“Where the mortgagor ostensibly sells the mortgaged property – on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale and the mortgagee, a mortgagee by conditional sale:

Provided that no such transaction shall be deemed to be a mortgage, unless the condition is embodied in the document, which effects or purports to effect the sale.”

From the definition, it becomes clear that in case of a mortgage by conditional sale, the mortgagor ostensibly sells the property to the lender with an in built condition making such ostensible sale as void, in case the borrower makes the payment. The sale becomes absolute in the future date, on default of the borrower. So, although in both the mortgages the property is purported to be sold but under the English mortgage the transaction of sale is absolute from the beginning but under a mortgage by conditional sale, the sale transaction is not final initially and is contingent on any future event. Under the English mortgage, the lender enjoys the rights of ownership of the property but not in case of a mortgage by conditional sale. Under both the transactions, it is not necessary for the mortgagor to hand over the possession of the property to the mortgagee.

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English mortgage and types of mortgage defined under transfer of property act

Section 58(a) of the Transfer of Property Act, 1882, defines a mortgage as under:

“A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.”

From the definition, it becomes apparent that a mortgage is done only for an immovable property, in order to secure repayment of a present, as well as future liability.

Second 58 further enumerates six types of mortgages as under:

1. Simple mortgage.
2. Mortgage by conditional sale.
3. Usufructuary mortgage.
4. English mortgage.
5. Mortgage by deposit of title deed (This is most prevalent in case of home loan transactions and is also known as equitable mortgage).
6. Anomalous mortgage.

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Out of the above, only two types of mortgages, i.e., simple mortgage and mortgage by deposit of title deed, are prevalent in India and others are of academic interest only in India.

English mortgage vs usufructuary mortgage

In an usufructuray mortgage, the mortgagor, means the borrower, transfers the possession of the mortgaged property to the mortgagee on the condition that the mortgagee is allowed to retain the property until the mortgage money is repaid completely. The mortgagee receives the income from the property like rents and profits, until the loan is repaid. However, he or she cannot go for foreclosure or sue the mortgagee for sale. Bankers do not favour this type of mortgage as it is in favour of the mortgagor.

The possession rights are with the mortgagee in case of English mortgage, however, the mortgagor is permitted to occupy the property or rent it out.

English mortgage in India: Why is it not popular?

There are various reasons for the English mortgage not becoming popular in India:

Not only at the time of taking the loan but also at the time of repayment of the amount, the parties have to pay applicable stamp duty and registration charges. Looking at the rates of stamp duty of upward of 5% in India and 1% registration charges, an English mortgage will increase the cost of transaction of borrowing by an average of 12%. Against this the transaction of equitable mortgage (mortgage by deposit of the title deed, which is permitted in a few cities) is relatively easy, with almost the same impact where the cost is minimal. Under the mortgage by deposit of title deed the borrower just deposits his title deeds with the lender. Except in the state of Maharashtra, it does not have stamp duty and registration cost implications, if it is done through recording of the transaction in the register of equitable mortgages maintained by the lender.

In addition to being very costly, the English mortgage is also inconvenient for the parties involved, as both, the lender and borrower, have to meet at the same time to execute, as well as register the agreement of sale with the registrar.

The Indian income tax laws do not have any express provision about tax implication of the sale transaction under the English mortgage. However, as the provision defining transfer of a capital asset does not enumerate the transaction of English mortgage under exceptions, in my opinion, the transaction will have income tax implications at both the occasions.

So, the mortgagor will have to pay capital gains tax at the time of execution of the documents creating the English mortgage. Likewise, the lender will also be liable to capital gains tax on the amount of appreciation in the market value of the property.

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(The author is chief editor – Apnapaisa and a tax and investment expert, with 35 years’ experience)

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