The ability of a mortgagee to reclaim a mortgaged asset following debt repayment is known as redemption. The mortgaged property is kept secure to return to the mortgagor after the obligation is settled.

The Mortgagor’s right 

The Transfer of Property Act of 1882 grants the mortgagor a number of privileges. These protections are there to protect borrowers from being taken advantage of. The following rights belong to the mortgagor:

• After debts are paid, you have the right to redeem the property (Section 60)
• The mortgagor may request the mortgagee to transfer the property to a third party rather than to him again (Section 60A)
• The mortgagor may request the mortgagee to provide documents pertaining to the mortgaged property, and may then examine such records (Section 60B)
• The mortgagor shall be entitled to benefit from any accession made to the property while it was in the hands of the mortgagee upon redemption of the property (Section 63)
• Any modifications made to the mortgaged property while it was in the mortgagee’s ownership are likewise entitled to the benefit of the mortgagor (Section 63A)
• When a mortgagor mortgages a lease property and the lease is renewed while the mortgaged property is still in the mortgagee’s possession, the mortgagor is entitled to profit from the renewed lease. 
• The mortgagee may lease the property while it is in legal possession (Section 64). (Article 65A)

Transfer of Property Act, Section 60

The mortgagor has the option to redeem under Section 60 of the Transfer of Property Act of 1882. According to this section, the mortgagor has the right to demand that the mortgagee return ownership of the mortgaged property to him or to any other third party that he chooses, as well as transfer the mortgage deed and any other pertinent documents to him, once the debt has been paid in full and on time. Hence, the mortgagor has the option to redeem his property upon debt repayment, and this power is referred to as the property redemption option.

The following fundamentals of the right of redemption can be formulated from a cursory reading of the section:

• The mortgage must be legally enforceable and valid.
• The mortgagor has the option to redeem the property by paying the loan, but a court may prevent him from doing so.
• The mortgage funds must be disbursed to the mortgagee or his representative at the appropriate location and time.
• The right to mortgage redemption may be enforced through legal action brought by the mortgagor.

In the English case of Stanley v. Wilde, a mortgage was defined as the act of giving a third party the right to an immovable property interest as security for a debt.

The Transfer of Property Act of 1882’s Section 60 envisions two critical concepts.

• Once a mortgage, always a mortgage
• Clog on redemption

Once a mortgage, always a mortgage 

The right to redeem a mortgage cannot be limited or terminated because a mortgage is always a mortgage. This right of redemption is generally applicable to all mortgages. According to the court’s ruling in Noakes & Co Vs. Rice, the mortgagee cannot impose any reservations that would prevent the mortgagor from exercising his right to redemption after paying the loan and any applicable interest. In the case of Knocks v. Roulds, the court ruled that a mortgage is always going to be a mortgage.

Clog on Redemption 

Any clause in the contract that limits the mortgagor’s ability to redeem the property after making the required principal and interest payments is invalid under the notion of clog on redemption. This doctrine is comparable to the idea of “once a mortgage, always a mortgage.”

The notion of the clog was established in Stanley when the court ruled that any obstruction to the right of redemption in a deed would render it void from the beginning. The Indian courts have also upheld this principle.

The doctrine of clog on redemption is founded on the idea that because of the mortgagee’s dominating position, any clause that limits the mortgagor’s right to redeem would be an abuse of that position by the mortgagee and would be in violation of the principles of justice, equity, and good conscience.

The Apex Court ruled in the landmark case of Vadilal Chhaganlal v. Gokaldas Mansukh that any restrictions or terminations of the mortgagor’s right to redemption imposed upon him would be null and void.

When the right to redemption is lost

According to Section 61(a) of the Limitation Act of 1963, the right of redemption expires 30 years after the right was first accrued.

The proviso to Section 60 states that if a lawsuit is filed with a court and a judgment is rendered by the court against the mortgagor, this right is no longer available when the deadline for principle repayment has passed.

Also, the right of redemption would expire if the state obtained the mortgaged property.

In the case of Moro v. Balaji, it was ruled that the mortgagee would be able to keep the share of the mortgaged property that he personally acquired, and the mortgagor could redeem his share.

Different Mortgages 

The Transfer of Property Act, 1882’s Section 61 envisions a scenario in which a mortgagor mortgages several properties to the same mortgagee. When the principal balance is due, the mortgagor can redeem the properties separately or jointly. A contract must not, however, conflict with the mortgagor’s preferences. By mutual agreement, the mortgagee and the mortgagor may opt to combine the redemption rights for all mortgaged properties.

Landmark Judgements

In the illustrious case of Prabhakaran and Ors v. M. Azhagiri Pillai (Dead) by Lrs. and Ors., the Supreme Court ruled that where a usufructuary mortgage stipulates that the mortgagee can possess the mortgaged property until the debt is repaid, the mortgagor may exercise his right of redemption in such a case by bringing a lawsuit within 30 years of the mortgage date. The court also ruled that the interpretation that there is no time restriction for the institution of the suit in cases of usufructuary mortgages is incorrect in law and that the mortgagor can file a suit to exercise his right only within thirty years of the institution of the usufructuary mortgage.

The Supreme Court of India held that while the mortgage deed may provide for a long term for payment, such terms must be justifiable, and a significantly long period would be considered a clog. This decision was made in the famous case of Pomal Kanji Govindji vs. Vrajlal Karsandas Purohit & Ors. 1988 SCR Supl. (3) 826. The Court ruled that when determining the validity of the period of payment, variables like inflation, real estate prices, interest rates (if any), the mortgagor’s financial and economic situation, etc., should be taken into account. The burden of proof lies with the mortgagee to demonstrate the validity of the period.

In the case of Seth Ganga Dhar v. Shankar Lal [AIR 1958 SC 770], the court held that although it had the authority to exempt the mortgagor from any clause of the contract that restricted the exercise of his right of redemption, it was also required to consider the pertinent facts and circumstances of the case in order to determine whether the mortgagor was forced into the agreement by taking advantage of his disadvantaged negotiating position. In this instance, the mortgage on the property was for 85 years.

On evaluating whether or not this time period was lawful, the Court noted that it did “not believe that everything in the mortgagee’s favor or that everything in the instrument was for his benefit and suggested that the mortgagee had pushed the mortgagor into a difficult bargain. We previously discussed how the agreement seems to have been fair and between parties who are interacting with each other on an equal footing”.

So, the clause would be regarded as legitimate if the court determined that the mortgagor and mortgagee were on equal footing. The Court determined, however, that a clause stating that the mortgagor must redeem the property within six months of the 85-year period’s expiration was illegal. The court will intervene and release the mortgagor from such an unfair arrangement only if the court is certain that the mortgagor has been unfairly ensnared by the mortgagee.

In the famous case of Bakhatawar Begum v. Hussaini Khanam, the court ruled that the deed might be redeemed because of a court order prior to the end of the time period specified in the contract.

The Transfer of Property Act is a supportive legal document with the purpose of “providing safeguard measures against tremendous financial hardship of the loanee in certain cases,” according to the Calcutta High Court in the case of Pranil Kumar Sett vs. Kishorilal Bysack and Anr. However, this benefit cannot be extended to recalcitrant and dozing borrowers.

Right to foreclosure 

Foreclosure refers to the mortgagee’s ability to seek a court order prohibiting the mortgagor from exercising his right of redemption. The mortgagee is granted the power to foreclose in order to recoup the amount. Section 67 of the Transfer of Property Act of 1882 provides for this power.

When the obligation has become due, the mortgagor has not made payment, and the agreement does not set a specific deadline for repayment, the mortgagee has the authority to foreclose. Also, the mortgagor must not have used his redemption option.

When the debt owed by the mortgagor becomes due and the mortgagor has not obtained a decree for exercising his right of redemption, Section 67, which deals with the “Right to fore-closure or sale,” states that the mortgagee has a right to obtain a decree for preventing the mortgagor from exercising the redemption right or to obtain a decree for the sale of the mortgaged property. The statute of limitations for filing a lawsuit to exercise the right to foreclose is twelve years.

Bottom line 

The right of the mortgagor to redeem the mortgage is therefore evident from the explanation above, and the mortgagee is unable to restrict or terminate this right. Any provision that renders the mortgaged property unredeemable after a predetermined amount of time would be in violation of Section 60 of the TPA. The mortgagor’s right of redemption is unalienable and coextensive with the mortgage.

By obtaining a court order to this effect, the mortgagee may take possession of the mortgaged property in their capacity as the original owner. If there are many mortgages on the same property, the mortgagee may redeem each mortgage individually or jointly, depending on whether a conflicting agreement is in place.

We can see that the mortgagee has also been granted the right to recoup the money that is really his. By virtue of Section 67, he may exercise his right of foreclosure. As a result, it is clear that the Transfer of Property Act is a useful legal regulation that aims to strike a balance between the rights of the mortgagor and the mortgagee while also taking into account the reality that, in most cases, the mortgagee is in a stronger negotiating position.

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On April 6, 2023, the Reserve Bank of India announced its first bi-monthly policy for the fiscal year 2023-2024 while maintaining the repo rate at 6.50%. The apex bank raised the repo rate by 25 basis points on February 8, 2023. With the hike, the repo rate—the interest rate at which India’s central bank loans money to established banks—rose to 6.50%. This fiscal year, the repo rate increased for the sixth time in a row. The repo rate has been increased by 250 basis points overall by the RBI in FY23. 

What does this decision entail for a house buyer?

Home purchasers are informed that the cost of borrowing will increase or decrease as a result of changes in the repo rate made by the RBI. Because the repo rate has such a big impact on your financial situation, it’s crucial to understand everything there is to know about it. Understanding how the reverse repo rate operates is also crucial to better understanding how your home loans function. 

For example, SBI customers who are currently making monthly payments of Rs 21,834 for a home loan for Rs 25 lakh with a 20-year term would soon be required to make payments of Rs 22,253 a month following the hike. The EMI would rise from Rs 19,400 monthly to Rs 19,846 if the loan had a 30-year term.

Understanding Repo Rate 

Financial institutions must pay interest for the money they borrow from the central bank in the same way that borrowers must pay a certain amount of interest to obtain credit from banks. The repo rate is the name of this interest. Repo stands for ‘repurchasing option” or “repurchase agreement,” respectively. According to the arrangement, scheduled commercial banks give RBI securities like Treasury Bills or gold in exchange for overnight credit when there is a liquidity shortage. 

It is important to note that banks require money to make loans. They can borrow from the central banks or accept deposits from the general population, and repurchase agreements allow for this.  

Current repo and reverse repo rate 

The repo rate is a useful instrument for the banking regulator to control inflation in addition to assisting banks with lending availability. The RBI raises the repo rate in cases of rising inflation to deter banks from borrowing. As a result, the economy’s liquidity ultimately declines, which eventually controls the high inflation. In the event of declining inflation, a reversing strategy is implemented. In this scenario, the repo rate is lowered to encourage banks to take on more debt, ultimately boosting the market’s supply and sparking new investment activities.

Notice that the credit supplied by the RBI to the bank in this manner is only provided for overnight use, and the banks purchase their securities that were deposited with the banking regulator at a predetermined rate. 

Reverse Repo Rate

The interest banks charge the RBI for credit extended to the banking regulator is the reverse repo rate. The RBI also employs reverse repo rates, which remove liquidity from the economy, to maintain desirable inflation levels. The RBI encourages banks to lend money to it by raising interest rates, which causes the system’s excess liquidity to be used up. As a result, banks do not have much available credit to lend. 

Difference between reverse repo and repo rate

Repo rate 

The interest rate the RBI charges for credit loans

Always higher than the rest for reverse repo

An instrument for reducing inflation 

Complies with a buyback agreement 

Bonds are used to conduct transactions

Reverse repo rate 

Usually less than repo rate 

An instrument for preserving financial flow

Functions according to the reverse repurchase agreement

Bonds are used to conduct transactions 

In transactions, bonds are used 

Principles of India’s repo rate

The RBI controls and sets the repo rate 

Repo rates are a method of reducing inflation

Based on the repo rate, banks modify the interest rates on savings accounts and fixed deposits 

The reverse repo rate was the name of the repo rate before October 2004

What is a monetary policy review

Every two months, the six-member Monetary Policy Committee of the RBI, chaired by the governor, meets to determine the bank’s monetary policy and adjust key interest rates in accordance with the economy’s state. The monetary policy review also summarizes the nation’s current economic circumstances and details the current and upcoming steps the RBI intends to take to boost the economy. 

How are houses affected by changes in the repo rate? 

Banks pay less for borrowing when the RBI reduces the repo rate. Banks are anticipated to eventually pass on this benefit to the customers. In contrast, when the RBI adjusts its lending rate upward, home loan interest rates also increase. 

Interestingly, banks are quicker to pass on rate increases to customers than they are, on average, to lower their lending rates. So, even though changes in the repo rate ought to be instantly reflected in the interest rates of financial institutions, this only increases the likelihood of quick transmission, and frequently the RBI needs to encourage banks to pass along the advantages of lower rates to borrowers. 

Future expectations may include faster transmission of policy as a result of the bank’s October 2019 decision to link the interest rates on house loans to the repo rate. Prior to that, banks priced house loans using internal lending benchmarks such as the prime lending rate, base rate, and marginal cost of funds-based lending rate (MCLR). 

The MCLR was an internal lending benchmark that went into force in 2016 and allowed banks to ‘reset’ the loan rate at intervals outlined in the loan agreement. The banks did not pass on these rate reductions from the banking regulation to the customers as quickly as was anticipated. However, the burden was immediately transferred in the event of a rise. 

When determining lending rates for MCLR-based loans, banks must also consider their cost of deposits, operating expenses, etc., in addition to the repo rates. Thus, MCLR-based loans are always likely to transmit changes in policy rates more slowly, according to Naveen Kukreja, co-founder and chief executive officer of Paisabazaar.com. 

Due to the MCLR regime’s modest performance, the RBI ordered banks to convert to an external lending benchmark in 2018. This would better position borrowers to profit from policy changes. After that, beginning in October 2019, banks shifted to the repo rate-linked lending system. Almost all of India’s major banks currently provide house loans based on the repo rate set by the RBI. 

Key factors about repo-rate linked home loans 

Buyers who take out a home loan at the repo rate or those who move from their current home loans to it need to understand certain details about these loans. 

Faster transmission: Any adjustments to the repo rate will likely be reflected in your EMI outlay considerably more quickly. 

Borrowers should anticipate a much faster transmission of their loan rates with repo-rate-linked house loans. Also, these loans will be more open in terms of the rate-setting process, which should provide consumers more assurance when estimating their loan interest rates, according to Kukreja. 

This also implies that your house loan EMI would increase if the banking authority modifies its benchmark lending rate. Hence, Kukreja cautions, repo rate-linked loans may actually operate against purchasers within the current environment of rising interest rates. 

Also, banks will finally decide how much extra interest they will add to the repo rate on mortgages. The lowest housing loan currently on the market is 8.50%, which is a two-percentage-point difference from the repo rate, which is currently at 6.50%. 

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