Difference Between Mortgage, Hypothecation and Pledge

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Mortgage is a commonly used term in banking and finance sectors. It means to keep one’s immovable possession as collateral, usually a house, in return of a loan. This is done by signing official loan agreement, with clear mention of the house or property being mortgaged against the loan. This type of loan is called a secured loan since the house is used to secure funds. The house, then, stays with the lender or the lending institute for the duration till which the borrower repays the loan. Thus, it is collateral against the financial risk that is taken by the lender. In case the borrower is unable to repay the loan, this mortgaged property is automatically transferred to the lender.

 

The mortgage can be registered mortgage or equitable mortgage. In registered mortgage, the borrower signs a formal document stating that the property is going to be mortgaged with the lender and the title deeds have been handed over to the lender as well. This needs to be done with the registrar and incurs a stamp duty based on the amount of loan taken. Equitable mortgage does not involve this process nor does it incur stamp duty, but has a risk of encumbrance. Most banks prefer registered mortgaging over equitable mortgaging.

 

It is not just houses that are used as collateral for a loan. One can also use car, vehicles, stocks and shares. The act of using such movable possessions for getting a loan is called as Hypothecation. In this case, the car or the company shares are the collateral against which an individual gets a loan. The possessions remain with the borrower even after the loan. But if the borrower defaults, the lenders takes over the possessions to sell them, in order to cover the cost. Mortgage and hypothecation, thus, are significantly similar, except one is used for immovable and other is used for movable property, respectively.

 

Apart from vehicles and shares, there are other immovable assets one may possess such as gold, advances against National Savings Certificate (NSC), advance against goods and stocks, etc. against which one can apply for a loan. This is called pledging, wherein you pledge the aforementioned possessions to get a loan. In this case, the possessions remain with the lender (pledgee), who is free to sell them in case the borrower defaults.

 

Mortgage Hypothecation Pledge
To get loan against House/ land/ plot/ property Shares, stock of goods, cars, vehicles Gold, NSC, stock of shares
Type of possession Immovable Movable Movable
Type of loan Secured Secured Secured
Possessions remain in the security of With borrower With Borrower With lender

 

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