What is Mortgage?
According to Anglo-American Property Law, a mortgage occurs when an owner pledges his or her interest (right to the property) as security or collateral for a loan. Therefore, a mortgage is the charge creation against immovable property that are attached to the earth or permanently secured anything which is attached to the earth. However, immovable property may include land, building, Plant & Equipment etc.
Underwriter of the mortgage loan (during loan approval process) verifies the financial information that is provided by the borrower. The financial information includes income, employment, credit history and the value of the home being purchased. An appraisal may be ordered and the underwriting process may take a few days to a few weeks. Again sometimes the underwriting process may be longer if there is any fault in the submitted documents and the documents requires to resubmit. However, any change made in the applicant’s credit, employment, or financial information could be the reason of loan denied.
Example of Mortgage
Mr. X takes a Home loan, and the house is mortgaged in favor of the bank/lender but remains in possession of the borrower, which Mr. X can use for himself or even may give on rent.
What is Pledge?
Pledge is exercised when the lender (Pledgee) takes actual possession of the property (i.e. Certificates, goods). This securities or goods are movable securities. In this case, the pledgee will retain the possession of the goods until the pledgor (borrower) repays the entire debt. If the borrower defaults, the pledgee has the right to sell the goods in his possession and adjust its proceeds towards the amount due (i.e. Principal and Interest amount).
Examples of Pledge:
Gold/Jewellery Loans, Advance against goods/stock, Advance against National Certificate etc.
What is Hypothecation?
This is used for creating a charge against the security of movable assets. The possession of the security with remains with the borrower itself. If the borrower defaults, the lender takes possession of security first and then sell them.
Example of hypothecation:
A car loan is one of the best examples of this type of arrangement. In this case, the possession of the car remains with the borrower but the same is hypothecated to the bank. If the borrower defaults, banks take possession of the car after giving notice and then sell the same and credit the proceeds to the loan account.
Difference Between Pledge, Hypothecation, and Mortgage at a Glance
|Topics of difference||Pledge||Hypothecation||Mortgage|
|Type of Security||Movable||Movable||Immovable|
|Possession of the security||Remains with the lender (pledgee)||Remains with Borrower||Usually Remains with Borrower|
|Examples of Loan where used||Gold Loan, Advance against NSCs, Adv against goods (also given under hypothecation)||Car / Vehicle Loans, Adv against stock and debtors||Housing Loans|