Mortgage and hypothecation are terms that are generally used to explain charge on assets secured for any loan. In both the cases, the ownership lies with the borrower which is the prime similarity between the two. However, these two mainly differ on the nature of asset secured, loan tenor, possession of the asset and loan amount.
Difference between Mortgage Vs. Hypothecation
Type of Security
Hypothecation is a charge created by a movable asset. The asset under hypothecation is usually a movable asset like a vehicle, stocks, accounts receivables, small machines etc. A mortgage is a charge created over immovable property which may include land, buildings, factory premise, godown /warehouse, anything that is attached to the earth or something permanently fastened to anything that is attached to the earth. One needs to note that crops though attached to earth cannot be included as “mortgaged” as they can be easily detached and sold.
Possession of the Asset
In the case of hypothecation, the possession of the asset remains with the borrower. In the case of a mortgage, the ownership is usually with the borrower but may not always be the case. It depends on the kind of mortgage created at the time of loan approval.
The amount of Loan
The amount of loan given against mortgage is usually higher than the amount of loan given just for hypothecation. For hypothecation against inventory, debtors, the vehicle generally, the amount is usually smaller; while the value of houses, land, and building etc. are usually of higher value, therefore attracting higher loan amount. Certain loans like “Working Capital” loans are a combination of financing against hypothecation of immovable assets like debtors and stock and mortgage of property.
Mortgage loans usually are of longer tenor (unless specific project/machinery which has a short definite life) as compared to loans against hypothecation. For example Tenor of a vehicle, the loan is generally shorter than the tenor of home mortgage loans. Also, loans given against stock, debtors are of the shorter period (renewable after a year or half year) compared to a mortgage loan (usually of 10-20 years).
Similarities between Mortgage Vs. Hypothecation
Ownership of the Asset
In both the cases, the ownership of the asset remains with the borrower with the first right being that of the lender until the time the loan is repaid. In a case of default, the lender may sell off the asset to recover the loan.
Recovery of Loan
In either case (mortgage or hypothecation), the lender has a charge over the assets. Hence, a lender can recover the loss by selling the asset, in the case of default.1–3