Mortgages and hypothecation are terms that are frequently used to explain loans that are taken out by individuals for the purpose of financing various assets. The similarity between the two is that in order for the loan to be granted an asset must be pledged to the bank; however, the ownership of the asset pledged will remain in the hands of the borrower. Due to the similarities between the two, many confuse them to be the same. The aim of this article to clarify the confusion by explaining in detail what mortgages and hypothecation mean and highlighting the main differences that make mortgages and hypothecation distinct.
Mortgage
Mortgage is a contract between the lender and the borrower that allows an individual to borrow money from a lender for the purchase of housing. Mortgages apply for property that is immovable such as buildings, land, and anything that is permanently attached to the ground (this means that crops are not included in this category). A mortgage is also an assurance to the lender which promises that the lender can recover the loan amount even if the borrower defaults. The home that is being purchased is pledged as the security for the loan; which will in the event of default, be seized and sold by the lender who will use sales proceeds to recover the loan amount. The possession of the property remains with the borrowers (as they will usually reside in their home). The mortgage will come to an end once in either two circumstances; if the loan obligations are met, or if the property is seized. Mortgages have become the widely used method for purchasing real estate assets without having to pay the total amount at once.
Hypothecation
Hypothecation is a charge that is created for assets that are moveable such as vehicles, stocks, debtors, etc. In a hypothecation, the asset will remain in the possession of the borrower and, in case the borrower is unable to make due payments, the lender will first have to take action to possess these assets before they can be sold off to recover losses. A very common example of hypothecation is car loans. The car or vehicle that is being hypothecated to the bank will be the property of the borrower, and in case the borrower defaults on the loan the bank will obtain the vehicle and dispose it off to recover the unpaid loan amount. Loans against stocks and debtors are also hypothecated to the bank, and the borrower needs to maintain the right value in stock for the amount of the loan taken out.
What is the difference between Mortgage and Hypothecation?
Hypothecation and mortgages are very similar to each other as they both allow the borrower to obtain funding from a bank by pledging an asset as collateral. The asset that is offered as collateral will remain in the possession of the borrower and will only be seized by the bank in the event that the borrower defaults on their loan; in which case the asset will be disposed, and losses will be recovered. The main difference between a mortgage and a hypothecation is that a mortgage is a charge created for property such as real estate that are immovable while hypothecation applies to property that is moveable in nature.
Summary:
Mortgage vs Hypothecation
• Mortgages and hypothecation are terms that are frequently used to explain loans that are taken out by individuals for the purpose of financing various assets.
• A mortgage is a contract between the lender and the borrower that allows an individual to borrow money from a lender for the purchase of housing.
• Hypothecation is a charge that is created for assets that are moveable such as vehicles, stocks, debtors, etc.
• A mortgage is a charge created for property such as real estate that are immovable while hypothecation is for property that is moveable in nature.