Hypothecation is the process of utilizing an asset as collateral in exchange for a loan. Hypothecation real estate is quite common in the commercial real estate world. However, this tool could be a useful way to leverage assets in your portfolio and obtain a more favourable loan or mortgage for a different piece of residential real estate.
Real estate hypothecation is when a borrower pledges collateral, such as a rental property, home, or movable assets like a car, boat, or stocks, to obtain a loan. The borrower pledges this asset to the lender as additional collateral if they cannot repay the mortgage and promissory note.

Hypothecation does not transfer any ownership rights of the asset from the borrower to the lender, nor does it give the lender the right to collect potential income from the property, such as rent. Instead, it places a lien against the pledged collateral, which allows the lender to seize the property or asset through foreclosure if the borrower defaults.

In residential real estate, hypothecation is common when a borrower tries to get a loan from a bank, and the lender is uncomfortable with certain aspects of the loan. These could include borrower qualifications or experience, loan-to-value ratio, the debt-to-income ratio of the borrower, or net worth, among other factors. Pledging additional collateral can balance these ratios and make the loan more appealing to the financial institution for lending.

Hypothecation may also be helpful when a property owner requests an unsecured loan or lower an interest rate to one more favorable. Lenders requesting the creation of a hypothecation loan are looking for assets that have an equitable title. It means that one can hypothecate a property even if there is an outstanding mortgage or debt as long as there is a certain amount of equity.

Hypothecation can be a beneficial strategy to improve terms for financing or get approved for a loan at all, though it does mean the risk of losing the pledged collateral. It is a possible outcome. For this reason, it is wiser only to hypothecate those assets which one is willing to lose. It is essential to recognize in which instances your property can get seized. If one finds himself/herself ever in a financial bind and unable to make payments on all their bills, they should consider prioritizing them by which ones they had hypothecated. For example, loan repayment on home and car before credit card payments so that one doesn’t lose those assets.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.