In India, a lender can take a property as security without a full registered mortgage deed. The borrower hands over the original title documents of the property, with the intention that they stand as security for the loan. This is called a mortgage by deposit of title deeds, or an equitable mortgage. The written record of the deposit is the MODT, the Memorandum of Deposit of Title Deeds.
It is popular because it is quicker and cheaper than a registered mortgage. That makes it worth understanding properly, because quicker and cheaper also means the lender has to do more of the checking.
What the law says, in plain words
The Transfer of Property Act, 1882 describes a mortgage by deposit of title deeds in Section 58(f). It applies where a person delivers documents of title to immovable property to a creditor, or the creditor's agent, with the intention of creating security. The Act limits this form to the towns of Kolkata, Chennai and Mumbai and to other towns that the state government has notified. Whether the deposit took place in such a town has been a deciding point in court cases, so the place where the documents are handed over matters.
The deposit itself is what creates the security. A memorandum is often prepared to record what was deposited, when, for which loan and on what terms. Courts have not always agreed on whether a particular memorandum needs to be stamped and registered, and the answer can depend on what the document says and on the stamp law of the state. Do not copy a template from another state without checking.
How an MODT loan usually runs
- Collect the original title documents, the chain of earlier sale deeds, the latest tax receipts, and the identity documents of every owner.
- Run a title search and ask a lawyer for an opinion on whether the title is clear.
- Check for existing claims on the property, such as an earlier mortgage or a court case. An encumbrance certificate from the registrar's office shows registered claims.
- Value the property and decide the loan amount using an LTV you are comfortable with.
- Have the owners deliver the original documents to you, in the notified town, with the written intention that they secure this loan.
- Sign the loan agreement and the memorandum, pay the stamp duty that your state's law requires, and register the documents if your lawyer says so.
- Keep the originals safe. Release them only when the loan is fully repaid, and record that you did.
Stamp duty on these documents is set by each state, so there is no single figure to quote here. Ask your lawyer for the current rate and rules in your state.
LTV for a loan against property
LTV, loan-to-value, is the loan divided by the value of the property. A loan of 600,000 against a property valued at 1,000,000 has an LTV of 60 percent.
| Loan | LTV | What it means |
|---|---|---|
| 400,000 | 40% | A large cushion. The property could lose more than half its value and still cover the loan. |
| 600,000 | 60% | A comfortable cushion for most lenders. |
| 800,000 | 80% | A thin cushion. After costs and a forced sale, little may be left. |
Property valuations are opinions. The price a property would fetch in a quick sale after a default is often lower than a fair market price, and recovery takes years in many cases, during which interest keeps running and costs pile up. Many lenders therefore keep LTV lower for loans against property than for loans against gold. Where you set the limit is your decision, and some lenders are bound by limits set by their regulator, so check what applies to you.
How secure is an MODT loan?
It can be a good form of security, and it is not the strongest form. These are its strengths and weaknesses side by side.
| What helps you | What to watch | |
|---|---|---|
| Speed and cost | Faster and usually cheaper to set up than a registered mortgage | Cheaper steps can mean fewer public records of your claim |
| The originals | A borrower cannot easily sell or pledge the property again without the original documents | Duplicates can sometimes be obtained, and a determined borrower may try |
| Value | Property tends to hold value better than many assets | Valuation errors and falling markets shrink your cushion |
| Ownership | The borrower stays the owner, so the relationship is simpler | You do not own or control the property, and cannot just take it |
| Recovery | You have a legal claim over the property | For most lenders recovery means a court case, which can take a long time |
A faster route to recovery under the SARFAESI Act is open only to lenders that qualify under that law, such as banks and certain financial institutions. Many small lenders do not qualify, so they should plan on the court route. Whether a lender qualifies is a question for a lawyer.
Where these loans go wrong
- The title is defective. The seller was not the full owner, the chain of documents has a gap, or a family member has a claim.
- One owner signs for all. If the property is jointly owned or inherited, every owner must take part.
- An earlier claim exists. A previous lender, a tax authority or a court order may rank ahead of you.
- The documents are not genuine. Forged or altered documents are a known risk, so verify them with the issuing office.
- The property is restricted. Agricultural land, land under a lease, or land that cannot lawfully be sold or mortgaged may not be good security.
- The deposit was in the wrong place or the wrong way. Where the documents were handed over, and the borrower's intention, can both decide whether the security stands.
- Nobody knows where the originals are. Lost, misfiled or released-by-mistake documents are an avoidable loss.
Keeping the records straight
- List each document received, with its date, number and condition, and who delivered it.
- Note where the originals are kept and who has access.
- Attach the title opinion, the valuation, the encumbrance certificate, and the signed memorandum and loan agreement.
- Record the LTV on the day you lent, and diarise a periodic review of the property value.
- Record the release of the documents on repayment, with the borrower's acknowledgement.
Check before you lend
This article is general information, not legal advice. Rules on stamp duty, registration, notified towns, money-lending licences and enforcement differ by state and change over time. Have a local lawyer review your process and your documents before you lend against property.
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