MORTGAGE AND HYPOTHECATION

MORTGAGE

A mortgage is one of the ways to raise cash utilizing the assets by creating a charge against immovable property where the amounts involved are generally very high, and the transfer of title is often passed. In contrast, Hypothecation is also raising cash by creating a charge against movable assets. However, the title of ownership is never transferred and generally involves much less than the mortgage

HYPOTHECATION

Hypothecation is a charge against movable property cars, accounts receivables, stocks, etc. The term ‘hypothecation’ is used to define a charge formed on any movable asset by the owner, to raise funds from the bank, without transferring the ownership and possession to the lender. In this agreement, the borrower (owner) of goods borrows money against the security of assets, i.e. inventories.

The lender is the hypothecatee, and the borrower is considered as hypothecator, under this arrangement. The rights of the hypothecatee are based on the hypothecation agreement between both the parties. If the hypothecator fails in paying the dues within the stipulated time, the hypothecatee can file a suit, to realise the debt by selling the hypothecated asset.

It is important for banks or other financial institution to exercise precautions while extending credit against hypothecation because of the following reasons:

As both ownership and possession of the assets rest with the borrower, it is a bit difficult for the lender to exercise control over it.

• The borrower may sell the asset hypothecated and discharge from other obligations.
• The borrower might raise double finance by hypothecating the same stock to another lender.
• When a borrower fails in paying the dues, asset realisation could be costly.

DIFFERENCES:

• A mortgage is taken for a huge amount, whereas hypothecation is done for a small amount.
• A mortgage is done for immovable properties like land, building, warehouse, etc. On the other hand, hypothecation is done for movable properties like cars, vehicles, stocks, etc.
• Under the mortgage, the interest of the asset would be transferred to the lender first, and then once the amount is paid off, it is re-transferred. But if the borrower can’t pay the amount, then the immovable property is sold off. Under hypothecation, the interest of the asset isn’t transferred. Rather, when the borrower cannot pay the amount due, the movable property is possessed and then sold off to get back the proceeds.
• For a mortgage, a mortgage deed is required as a legal document. For hypothecation, the hypothecation deed is necessary as a legal document.
• The tenure of a mortgage is more since the loan amount is huge. But in the case of hypothecation, the term is lesser since the amount of loan is lower.