A ship mortgage is a financial interest in a ship offered to a creditor in exchange for a loan. If the shipowner defaults on the loan, the creditor can seize the ship to recover the loss. Ship mortgages are often used to finance the purchase or construction of ships, but they can also be used to secure other types of loans. The loan is considered a maritime lien. Ship mortgages carry some inherent risks to the creditor because of the nature of how the ship is used; unlike a house mortgage, the owner can sail out of the creditor's jurisdiction, for example.
Use of mortgages to finance activities related to shipping dates to the 19th century, and they cover ships and their machinery, but not the contents of the ship. Cargo, freight, and personal possessions are not subject to the lien. One of the risks with a ship mortgage is that it may not necessarily take precedent in the event of a bankruptcy. Ships can have other liens, including prior mortgages, that might make it difficult to assert a financial interest and recover debts.
Creditors have the option of registering a mortgage in some regions to require the shipowner to carry insurance and provide proof that they are the first in line if the shipowner defaults or files for bankruptcy. Carrying insurance is particularly important, as there is always a chance that a ship will be lost, ending the financial interest in the property because it no longer exists. The ship mortgage may include a clause requiring the owner to carry insurance with the creditor as a beneficiary in the event of a loss. Creditors cannot stop ships from sailing out of their jurisdiction as part of their regular work, so they also run the risk of losing the ability to seize the ship if a problem arises with the loan.
Numerous laws around the world, like the Ship Mortgage Act of 1920 in the United States, cover various aspects of ship mortgages. They are part of admiralty law, the body of law concerning activities on the high seas. In preparation for a ship mortgage, creditors and debtors usually work with experienced attorneys who can establish appropriate contracts and advise both parties of their rights and responsibilities under the law. Shipowners preparing to take out mortgages in jurisdictions they are not familiar with may want to discuss the matter with a lawyer before proceeding to avoid any hidden surprises.