What is the Equity of Redemption?

The equity of redemption applies to a person who has mortgaged property to another as security on a loan refers to the historical right of that person to redeem that property after the debt is paid. The phrase is often used in modern times to refer to the right a person has to acquire the legal title to his or her property by repayment of the mortgage, plus any interest and fees, within a specified time period even after he or she has defaulted on payments. By doing this, the debtor can avoid foreclosure proceedings.

A mortgage is a loan that is secured by a person’s real property. That is, a person, called the mortgagor, pledges that he or she will repay the loan under specific parameters. If he or she does not, the lender, or mortgagee, can take the real property as satisfaction on the loan.

Originally, the mortgagor actually conveyed legal title to the mortgagee with the understanding that the mortgagor would receive the title again when the debt was paid. This right of the mortgagor was called the equity of redemption. It is called an equity because historically it was enforced by courts of equity as opposed to courts of law. This distinction has, for the most part, fallen by the wayside, but the term remains.

The right is considered its own type of property and therefore can generally be sold or traded by the holder. It is considered an important right, and courts have historically been very careful that no clause was introduced into the mortgage agreement that would interfere with the mortgagee’s equity of redemption. Courts have become more willing to accept encumbrances on the equity of redemption in recent decades.

In modern times, most mortgages are governed by a statutory charge rather than an actual legal conveyance of title. The equity of redemption, however, still gives the mortgagor the right to retain the property by paying off the totality of the loan, plus any interest and fees. This can be done even after the mortgagor has defaulted on the mortgage by missing payments.

One important point about equity of redemption is that it must be exercised prior to foreclosure proceedings being implemented. This distinguishes it from statutory rights of redemption, which allow a mortgagor to redeem the property within a certain time period even after foreclosure. In the United States, the existence of and the time period for a statutory right to redemption will vary from state to state.