In property relations in particular for the purchase and sale of real estate or financial transactions stipulated in legal documents two forms are often mentioned – charge and mortgage which have distinctive features that must be outlined. There is a difference between charge and mortgage.
Charge
- Definition: A charge and title is a kind of security interest arising in or over property, including land, the property for release of which a person is responsible in accordance with a debt or other obligation. It does not entail passing of the property to the creditor but provides him or her with rights on the property in the prosecution of the agreement in the event of default by the debtor.
- Nature of Interest: In a charge, the lender (creditor) has a right or interest in the particular property to be charged in order to secure the amount of money due from the borrower (debtor). Such interest is paid until the debt has been fully repaid.
- Types of Charges: There are various types for charges like fixed charges that are attached to some fixed assets and the floating charge that takes place in frequently changing assets like inventory.
- Priority: The charges are prioritized by the time the charges were entered in the system. Relative priority helps in the determination of the order of payment in case of liquidation in that the first claim is paid followed by the second and so on.
- Registration: This is true because for a charge to take legal effect against third parties it must be registered for example with the Companies House in the UK if the company is incorporated there.
Mortgage
- Definition: A mortgage is a legal contract which is entered into between a borrower and a lender where the borrower receives cash and gives the lender a right of lien over property. In this case the property under consideration is used to secure the loan.
- Transfer of Title: While taking a charge, you convey the title of the property to the charge holder as a security for the amount borrowed unlike in the case of mortgage. If the borrower ever re pays the loan then the title returns with the borrower completely.
- Foreclosure: In case the borrower fails to make the scheduled mortgage payments then the lender has the legal option to repossess the house, auction it and recover the loan.
- Loan Purpose: Mortgages tend to be employed in purchase of residential and or commercial buildings. It can also be used for purposes of refinancing other properties or for getting home equity loans.
- Regulation: Mortgages have certain legal provisions that relate to interests, terms, subjection to foreclosure, and statutes that protect the borrower.
Overall, charges and mortgages are both used to make securities of debts and properties, but charges have an absolute interest unlike mortgages, do not require registration as a charge while mortgages do, and the difference in the mode of foreclosure. It is important for the borrowers as well as the lenders to know these distinguishing factors in order to be able to work well with the real estate transactions and financial agreements.
