Collateral vs Primary Mortgages

Mortgage - simply means 'offering our ownership interest (share certificate) in an immovable property, as a security, to a lender of money, who has lent money to us against such mortgage made (In hindi we say 'Girvi' rakhna).

Now,

from above definition 2 things can happen, plz understand the following very carefully....

a. offering of security of a prime property (land/house etc.). (i.e. mortgage loan through mortgage of prime property)

b. offering of security of a collateral property (land/houseetc.). (i.e. mortgage loan through mortgage of collateral property)

Let us consider a. offering of security as a 'prime security' (i.e. mortgage loan through mortgage of prime security)

This situation is the one which you often come across when someone purchases a new house through loan obtained from bank for the same purpose.

Here, the agreement is such that, the bank will lend you money for purchasing the flat if you mortgage the to be purchased flat with the bank.

Hence this is known as 'prime security', because mortgage is done on the very same property to be purchased by you.

In case we make a default on the loan payments here, then the bank will snatch our purchased house and.....u know it.

Now,

Let us consider b. offering of security of a collateral property (i.e. mortgage loan through mortgage of collateral property)

This situation is the one wherein we obtain loan against our existing house property. The loan can be for any purpose of ours like any emergency settlement, new house etc.

So, this situation is termed as a collateral security because the purpose for which the loan is taken (suppose say new car, new flat) is not mortgaged with the bank, instead our existing house is mortgaged with them.

Here if we make a default, then the existing house is gone...not the new asset purchased and so on.

Hence, collateral security is something which is not the main subject but a subject away from the main subject, hence collateral (secondary).

Note:

After considering the macro economic environment and the income capacity of the borrower, the bank may ask for both form of securities i.e. prime and collateral together.

So, 'Caveat Emptor' - Be Aware as a customer - is the funda to be learned from above.

I have made a genuine effort for explaining the above concept, in case if i am wrong, feel free to correct me.

I also request other people to come up with such common concepts, as this will enable knowledge sharing amongst us and help us mutually.

Regards

Mihir.
PG Finance 2nd Year

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