Understanding Ship Mortgage: A Guide for Maritime Financing

Posted on Jun 05, 2024 at 11:06 PM

Ships are assets with high costs and values with all their structural standards and equipment to operate effectively, thus, many ship owners apply for a ship mortgage to have the required financial capability and buy or build their dream vessel.

The whole concept of vessel mortgage revolves around providing suitable financing for the ship owner whether he/she needs it for repairing, buying, or maintaining.

Today, we are going to share with you vital information about the ship mortgage, how the law of ship mortgages works, what mortgage loan components, basic types, and key terms and conditions of ship mortgages.

What Is Ship Mortgage?

A ship mortgage is a mortgage loan agreement where the loan is secured with the documented ship as collateral between the mortgagor who borrows the money and the lender, the mortgagee, who holds a mortgage on the boat.

Moreover, the ship mortgage is the ship finance security way to guarantee the lender rights by sharing with him/her an interest in the commercial ship. This security loan registration, under the national maritime law, ensures that if the mortgagor cannot pay the loan transactions, the lender can take possession of and sell the ship to recover the valid debt.

However, for all of that to be valid and legal, the ship mortgage must be officially signed, registered, and executed with the appropriate maritime authority to be effective and enforceable against third parties. Meaning that the lender will have priority over most other claims against the merchant vessel, except for certain recorded maritime liens.

How Does Ship Financing Work?

If you attend a professional shipping finance course online, you will understand the basic steps of ship financing, funding, and mortgaging based on maritime law. However, now we are going to share with you some details about the main documentation steps of the application:

• Loan Agreement: A shipowner, the borrower, who needs funds to buy or repair a ship, searches for statutory lenders, like banks.

• Evaluation: The lender, the mortgagee, initial step is assessing the vessel's value, the mortgagor's creditworthiness and status, fixed and expected income, and the loan's default risks.

• Terms Negotiation: Both parties, the mortgagee and mortgagor, negotiate the loan amount, interest rate, accepted repayment period, discharge notice, and mortgage collateral property (often the ship itself).

• Legal Formalities: Ship mortgages and loan forms are registered with maritime authorities for security and legal protection by a public notary.

• Repayment: The shipowner, the mortgagor, repays the loan to the mortgagee in many payments over the agreed period, usually with interest.

• Risk Management: If the owner fails to provide on time, the mortgagee can accompany or lien the mortgaged vessel and sell it to recover the unpaid debt.

• Completion: Once the loan is fully repaid with the interests, the shipowner regains full ownership of the vessel, without any type of claims or appurtenances.

The Components of Ship Mortgage:

Ship mortgage is important in the shipping industry, as it provides maritime investors with a legal marine agreement to grow, secure, and improve their line in the industry. Moreover, to guarantee the maritime mortgage loan success, you need to carefully consider and respect all these securing components:

• The Mortgage Loan:

This is the actual and original amount of money borrowed by the shipowner from the lender, secured by the ship. This registerable loan is usually needed to finance the initial purchase process, construction program, or governed maintenance of the vessel.

• The Mortgage Document:

These security and legal agreements are the used documents to protect the rights and obligations of included parties by the court and law based on the agreed-on terms and conditions of the mortgage. Including the loan amount, interest rate, repayment schedule, discharging term, insurance, and details of the ship used as collateral.

• The Ship Mortgage Arising Rights:

These prescribed mortgage rights, which differ from one region to another, give the lenders security privileges in the case of non-payment, such as the ability to take possession of and sell the ship to recover the outstanding debt.

Types of Ship Mortgages:

Ship owners may need a ship mortgage in different levels and conditions, thus, the need for different legal and secured mortgages required the existence of these types:

• Legal Mortgage:

This is the most common mortgage type, involving a legal registered form with maritime authorities, to provide the lender with a strong legal claim to the vessel.

• Equitable Mortgage:

This type is used when legal formalities are incomplete, like taking a loan to build the vessel. But still offers the lender an equitable interest in the vessel, though not as strong as a legal mortgage.

• Bottomry Mortgage:

Unique maritime financing, where the loan is taken in emergencies, like repair and destress, however, the mortgage comes with a high-interest rate, and high-risk factor as it is repayable only if the voyage is completed successfully.

Eventually,

Ship mortgage implies on great legal way to help shipowners grow their investment value, whether, they are looking for a way to upgrade their vessel, maintain it, or even construct the vessel of their dreams.

However, you need to deeply understand shipping finance to protect your rights and assets before going through this maritime step.