What is a Mortgage?

A mortgage is the most powerful form of security interest because it actually transfers title of the asset to the lender as security for the loan, subject to an agreement to transfer ownership back to the borrower when the loan is repaid. As a result, it is not possible for the borrower to sell the asset prior to paying off the loan. In addition, ownership makes it easier for a lender to enforce the security interest if the borrower defaults on the loan.

Legal mortgages can be created over any type of property to which the debtor holds legal title and capable of being transferred. This includes land, goods, and certain types of intangible property (such as share certificates) that are represented by documents which transfer title. Legal mortgages cannot be created over future assets, assets in which the debtor only has an equitable interest, and most intangible assets.

However, it is possible to create an equitable mortgage over certain assets where a legal mortgage is not possible. An equitable mortgage involves the transfer of beneficial title in an asset to the lender as security for a debt, while the borrower retains legal title. In general, an equitable mortgage will arise where the formalities necessary to create a legal mortgage have not been complied with, the parties have merely entered into an agreement to create a legal mortgage in the future, or the property to be mortgaged is recognized only in equity.

The requirements for creating a legal mortgage depend on the type of property being secured. A legal mortgage over land requires a deed, and a legal mortgage over goods is normally evidenced by a mortgage document (both of which may be part of a Debenture). If shares in a company are being mortgaged, the share certificates are transferred into the lender's name in company register (but if only a charge or pledge is taken over those shares legal title will not pass and will not therefore need to be registered.

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