Last week, a reader emailed and seeking to know what difference there is between a mortgage and an ordinary loan. This is a question that has quite often come up in the minds of people who want to take loans for development and weigh them against mortgages.

A mortgage is defined by diff-en as a type of loan that is secured with real estate or personal property.

Loan

Diff-en defines a loan as a type of debt that entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt.

Currently in Kenya, interest rates on loans average 20% per annum with the Central Bank base rate at 13%. Commercial banks peg their rates on the Central Banks base rate. Loan provision is one of the principal tasks for financial institutions.

Mortgage

A mortgage is a method of using property (real estate or personal property) as security for the payment of a debt. The term mortgage refers to the legal device used for this purpose, but it is also commonly used to refer to the debt secured by the mortgage, the mortgage loan. In Kenya, mortgages are strongly associated with loans secured on real estate rather than other property other than land and real estate.

Arranging a mortgage is seen as the standard method by which individuals and businesses can purchase residential and commercial real estate without the need to pay the full value immediately. In many countries it is normal for home purchases to be funded by a mortgage.

[caption id="attachment_20984" align="aligncenter" width="648"] Loans Vs Mortgages (Pesatalk)[/caption]

Types of loans vs mortgages

 Types of Loans

 Secured Loans

A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing.  There are two types of secured loans, direct and indirect. A direct loan is where a bank gives the loan directly to a consumer. An indirect loan is where the financial institution pays directly to the supplier for the product e.g cars etc.

 Unsecured Loans

These may be available from financial institutions under many different guises or marketing packages e.g personal loans, education loans, bank overdrafts etc. The interest rates applicable to these different forms may vary depending on the lender, the borrower.

Types of Mortgage

There are three types of  mortgage.

Mortgage by demise

In a mortgage by demise, the creditor becomes the owner of the mortgaged property until the loan is repaid in full (known as "redemption"). This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption.

Mortgage by legal charge

In a mortgage by legal charge, the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it. To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority.

Equitable Mortgage

In an Equitable Mortgage the lender is secured by taking posession of all the original title documents of the property and by borrower's signing a Memorandum of Deposit of Title Deed (MODTD). This document is an undertaking by the borrower that he/she has deposited the title documents with the bank with his own wish and will, in order to secure the financing obtained from the bank.