HOW CAN AN INVESTOR TAKE A LOAN BY SECOND MORTGAGE

HOW CAN AN INVESTOR TAKE A LOAN BY SECOND MORTGAGE
Rajkumar S Adukia

researchadukia@gmail.com

What is a Mortgage?
Transfer of property act 1882, deals with mortgage. The relevant section is 58(a). It Says,
“A mortgage is the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.
The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being are called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage-deed.”
So we can say that the necessary ingredients are: -

1. Transfer of interest in specific immovable property
2. Transfer is for the purpose of securing the payment of money advanced or to be advanced by way of loan.
3. It may be existing and future debt.
4. It may also be for performance of an engagement, which may lead to financial liability

What is a Second Mortgage?
A second mortgage is a secured loan which is subordinate to another loan taken against the same property. In real estate, a property can have multiple loans against it. The one which is registered first is called the first mortgage and the loan which is registered second is called the second mortgage.
Second mortgages are called subordinate because if the loan goes into default, then the first mortgage gets paid off first before the second mortgage gets any money.

Conditions for a second Mortgage
As such there is no restriction under law to create a second mortgage for the same property if the first mortgagee has no objection to a second mortgage.
Many organizations are already providing such loans; the precautions shall be taken by the housing finance companies keeping in mind the factors affecting the recoverability of the amount loaned. The clearance/ acceptance letter from the institution holding first charge shall be obtained at the first place, in addition of other documents to safeguard the interests of the company issuing the loan.
A property may have multiple mortgages on it. Second mortgages are subordinate, meaning that in the event of default, the primary, or first mortgage would get paid off first, and then any funds remaining would be used to pay off any second mortgages. For this reason, second mortgages typically carry a higher rate of interest. Also, like first mortgages, second mortgages also carry closing costs and “points” that may make the total cost of the second mortgage more expensive.
In the most common type of second mortgage, a property owner may borrow up to the amount of equity he or she has in the property. For example, if the owner has a property valued at Rs10, 00,000 and currently owes Rs7, 50,000 on the first mortgage, a second could be taken out for Rs 2, 50,000. Because this type of second is still 100 percent secured by equity, it is the easiest type of second mortgage to get, and will not be as expensive as other second mortgages that are not fully secured.
It is also possible to obtain a second mortgage in excess of one’s property’s value. With a 125 percent loan-to-value loan, the total indebtedness can be 125 percent of the value of the property. This type of loan may be more difficult to obtain, and may require superior credit.
Some features of second mortgage loans
o The loans can last anywhere from one to twenty years and they typically have a fixed interest rate, although this is usually slightly higher than the current rates of a first mortgage loan. Not unlike other loans, interest rates are determined by a number of factors including: creditworthiness of the person taking the loan.

o The loan amount – Lower loan amounts are a lower risk to the lenders

o The amount of equity remaining in the property after the loan is made – The more equity is leftover, the more likely the borrowers are to pay back the loan

Second Mortgage in India

Second mortgage loan can be applied only if the borrower works in a housing finance company in India. So if say Mr. A works in a housing finance company and he has taken a loan for purchase of land and now he wants to avail a loan to build on that particular land, he can avail of this loan from any other housing finance company.
The procedure for this is that the name of this second housing finance company should be there in the approved list of housing finance companies of the employer. Then this employer should give a No Objection Certificate (NOC) to the borrower and he can avail of the second mortgage. The No Objection Certificate is a must before availing of the second loan. Only on receipt of the No Objection Certificate will any housing finance company consider the request for a second mortgage.
The borrower needs to take all the relevant documents and pay slips and approach the second housing finance companies. They will need to know what was the purpose of the original loan and other details and after due verification, sanction this second loan. This is called second mortgage. Currently the rate of interest for second mortgage is around 8.25% pa.

Sample Deed of Second Mortgage

THIS MORTGAGE made at ………………… the ……….. day of …………………, 2006, between A, son of ………………………………. resident of ……………. hereinafter referred to as the Mortgagor, of the ONE PART and B, son of ………………… resident of ……………….. hereinafter referred to as the Mortgagee of the SECOND PART.

WHEREAS by a Deed of Mortgage dated the ………………… between A of the ONE PART and C of the OTHER PART and registered with the Sub- Registrar of ……….. under No. ………………… of ………………… 19 ……. on ………………… day of ………………… 19 ….. the said A, as owner of the property described in the Schedule hereto, mortgaged the same to Shri C for Rs. ………………… with interest at the rate of ……… % p.a. subject to the redemption of the premises upon payment by the said A, his heirs, executors, administrators or assigns unto the said C, his heirs, executors, administrators or assigns, of the sum of Rs. ………………… with interest at the rate of ……….. % p.a. on the ………………… day of ………………… 19 …….

AND WHEREAS the said A, the Mortgagor could not pay the mortgage money and interest due and payable thereon to the mortgagee.

AND WHEREAS the said A, the Mortgagor has requested the Mortgagee to lend a sum of Rs. ………………… subject to the first mortgage hereinbefore mentioned.

AND WHEREAS the said Mortgagee has agreed to lend to the said Mortgagor a sum of Rs. …………….. at interest of ………. % per annum and having the repayment thereof secured to him by second mortgage.

NOW THIS INDENTURE WITNESSETH THAT in pursuance of the said agreement and in consideration of the said sum of Rs. ………………… lent and advanced by the Mortgagee to the Mortgagor on the execution of these presents (receipt whereof doth hereby admit), the said Mortgagor doth hereby grant unto the said Mortgagee, his heirs, administrators, executors and assigns all that piece or parcel of land bearing Plot No. ………. situated at,………………………………… within the Registration District and Sub-District of ………………… and more particularly described in the Schedule hereunder written hereinafter referred to as the said premises together with all his rights, privileges, easements and appurtenances and all the estate, right, title, interest, claim and demand whatsoever of him the Mortgagor into and upon the said premises and every part thereof to have and hold the said premises forever and subject to the hereinbefore recited first Mortgage and the principal sum and interest thereby secured and subject also to the proviso for redemption hereinafter contained provided always that if the said A, his heirs, executors, administrators or assigns shall pay to the said B, his heirs, executors, administrators or assigns, the sum of Rs. ……………. with interest for the same at the rate of ………….. per cent per annum from the date of these-presents, then the said B, his heirs, executors, administrators or assigns, at the request of said A, his heirs, executors, administrators or assigns will reconvey the said mortgaged premises hereby granted and if the said sum of Rs. ……………….. with interest for the same at the rate of ………………. per cent per annum shall not be paid on the ……………. day of ………………… or, then the Mortgagee, his heirs, executors, administrators or assigns will be authorised to enter into and upon the said mortgaged premises and may henceforth possess and enjoy the same and receive the rents and profits thereof, without any interruption, interference, eviction, claim or demand from or by any person or persons whomsoever, except in respect of the said first mortgage and it is hereby agreed and declared that the Mortgagee, his heirs, executors, administrators or assigns shall be authorised to sell the mortgaged premises hereby granted or expressed to be so, or any part or parts thereof, without any further consent of the Mortgagor, his heirs, executors, administrators or assigns, either subject to said first Mortgage or freed and discharged therefrom and either together or in lots and either by public auction or private contract or to rescind any contract for the sale thereof and to sell the same without being answerable for any loss or diminution in price and with full power to execute assurances, give receipts for the purchase money and to do other acts and things for completing the said sale, which the said mortgagee, his heirs, executors, administrators or assigns shall think proper and the proceeds of the sale of mortgaged property or any part thereof shall be applied by mortgagee first towards the cost and expenses attending such sale, or incurred in relation to this security and then in satisfaction of the moneys which shall then be owing on the first mortgage and in the last, the balance shall be appropriated towards the moneys payable under these presents and surplus, if any, shall be paid to the Mortgagor, his heirs, executors, administrators or assigns.

And the Mortgagor hereby covenant that he is the absolute owner of the mortgaged premises and the said property is free from encumbrances, except the first mortgage recited above.

IN WITNESS WHEREOF the parties have put hereunto set and subscribed their respective hands the day and year first hereinabove written.

The schedule above referred to

Signed and delivered by the withinnamed Mortgagor

Signed and delivered by the withinnamed Mortgagee
WITNESSES;
1.

2.

Received the sum of Rs. …………… (Rupees ………………………………….) from the withinnamed Mortgagee being the full consideration money with in mentioned to be paid by the Mortgagee to me.

Rs. ………………..
I say received.
………………..
Mortgagor