A legal mortgage is a type of mortgage where the banker holds a security interest in an asset, such as real estate. A legal mortgage prevents the asset from being sold, but allows the borrower to obtain credit by taking out a third party mortgage. For example, a customer can make a mortgage against a hundred million-dollar property. That means that he can obtain a credit facility from several banks. A legal mortgage is more formal and gives the banker greater protection in the event of default.
Although a legal mortgage may appear to be the preferred option, the benefits of this option can be outweighed by the risks of transferring the assets. For example, if a borrower wants to hold onto a subsidiary company, the benefits of a legal mortgage may be negligible. Moreover, the Lender may not require such benefits to protect its interests. As such, a legal mortgage may be inconvenient and costly to implement, if the borrower intends to sell the property.
A legal mortgage has some distinct advantages over an equitable mortgage. Unlike equitable mortgage, a legal mortgage allows the customer to redeem the property if he defaults on the loan. This right must be exercised before it lapses. This right is referred to as equity of redemption. The banker retains the land mortgaged. However, it is important to note that there are disadvantages as well. You may end up with a mortgage that is worthless and has little value.
One of the biggest advantages of a legal mortgage is that it is easier to enforce. In contrast, an equitable mortgage requires a court order for the mortgagee to sell the property, foreclose on it, or appoint a receiver. This means that it is easier for a mortgagee to commit fraud, and a fraudulent borrower can use a fraudulent title deed to acquire additional properties in security transactions. However, a legal mortgage can be inherited or successively granted.
Another advantage of a legal mortgage is that the mortgagee has full rights. If the mortgagee decides to resell the property, he has the right to assign the mortgage to another party. If he resells the property, the mortgagee can do so and recover the debt from the purchaser. The lender must also be willing to negotiate on price. If the mortgagee is willing to negotiate, a legal mortgage will most likely be a better option for him.
