REAL ESTATE MORTGAGE IN THE PHILIPPINES
A comprehensive legal primer with a sample contract
Disclaimer: This article is for academic and informational purposes only and is not a substitute for personalized legal advice. Always consult a Philippine‑licensed lawyer or the appropriate government office before acting on any matter discussed here.
1. Definition & Concept
A real estate mortgage (REM) is a contract whereby immovable property—land and/or buildings—is given as security for the fulfillment of a principal obligation (usually a loan). Ownership remains with the mortgagor, but the property becomes liable (directly and immediately) for payment; if the debtor defaults, the mortgagee may cause its sale and satisfy the debt from the proceeds.
2. Governing Law & Key Sources
| Subject | Primary Authority |
|---|---|
| Nature, requisites, effects | Civil Code (Arts. 2085‑2125) |
| Extrajudicial foreclosure | Act No. 3135 (as amended by Act 4118) |
| Judicial foreclosure procedure | Rules of Court, Rule 68 |
| Registration & annotation | P.D. 1529 (Property Registration Decree) |
| Documentary stamp tax | NIRC (Sec. 195) |
| Anti‑Money Laundering / KYC | BSP Circular Nos. 706, 950, etc. |
| Special programs (e.g., Pag‑IBIG) | R.A. 9679 & HDMF circulars |
3. Essential Requisites (Art. 2085, Civil Code)
- Mortgagor’s capacity – He/she must be the absolute owner or have authority to encumber.
- Free disposal of the property – No legal impediment (e.g., adverse notice, legal usufruct, agrarian claim).
- Determinate property – Adequately described so it can be identified.
- Secures a valid principal obligation – Existing or future (up to a maximum amount expressly stated, Art. 2124).
Tip: A mortgage without a maximum cap is void for what exceeds the actual obligation.
4. Parties
| Party | Usual rights & duties |
|---|---|
| Mortgagor / Debtor | Pay the debt, keep property insured, pay real‑property taxes, maintain peaceful possession. |
| Mortgagee / Creditor | Hold the mortgage instrument, collect payments, foreclose upon default, apply proceeds to debt. |
| Third‑person mortgagor | May grant security for another’s loan (Arts. 2085‑2088). |
5. Form & Registration Requirements
| Step | What & Where | Effect |
|---|---|---|
| A. Written instrument | Public instrument (notarized) describing the land (Lot & Plan No., area, TCT/CCT number, boundaries) and the obligation. | Perfects the mortgage between parties. |
| B. Documentary Stamp Tax | BIR Form 2000‑OT – ₱20 for the first ₱5,000 of loan + ₱10 for every additional ₱5,000 or fraction thereof. | Must be paid before registration. |
| C. Registration/Annotation | Register of Deeds where the land is located; annotation on the back of the Transfer/Condo Certificate of Title. | Binding on third persons; establishes mortgagee’s priority. |
Failure to register does not void the mortgage between the parties but makes it ineffective against innocent third parties and subsequent encumbrancers in good faith.
6. Typical Clauses in a Philippine REM
- Loan amount & cap (for future‑debt or credit line mortgages)
- Interest, penalties & default rate
- Description of property (metes‐and‐bounds, TCT/CCT data)
- Insurance covenant (naming mortgagee as loss payee)
- Real‑property tax covenant
- Negative pledge / Non‑alienation clause
- Events of default
- Acceleration
- Foreclosure remedy (choice of judicial or extrajudicial)
- Attorney’s fees & costs
- Dragnet or “blanket” clause (optional; interpreted strictly)
- Venue & governing law (Philippines)
7. Sample “Bare‑Bones” Real Estate Mortgage
(All names and details are fictional; adjust to your transaction.)
REAL ESTATE MORTGAGE
KNOW ALL MEN BY THESE PRESENTS:
THIS MORTGAGE is executed this _____ day of ________ 20__ at ________, Philippines by and between:
(1) JUAN DELA CRUZ, of legal age, Filipino, married to Maria Santos, with residence at 123 Mabini St., Quezon City, hereinafter called the “Mortgagor”; and
(2) ABC BANK, INC., a universal banking corporation duly organized and existing under Philippine laws with principal office at 987 Ayala Ave., Makati City, herein represented by its Vice President, ATTY. PEDRO REYES, hereinafter called the “Mortgagee.”
WITNESSETH:
- Loan. The Mortgagee has granted the Mortgagor a loan/credit accommodation in the principal amount of P 3,000,000.00, Philippine currency, with interest at 10% per annum, payable monthly beginning ___ 20__ until ___ 20__.
- Security. To secure full and faithful payment, the Mortgagor hereby constitutes, in favor of the Mortgagee, a first and superior mortgage upon: • Lot 4-B, Psd‑00‑123456, containing an area of 350 sq m, covered by TCT No. N‑56789 of the Registry of Deeds of Quezon City, together with all improvements present and future.
- Future Obligations. This mortgage shall also stand as continuing security for (a) renewals and extensions, (b) interests, penalties, charges, and (c) any other obligations the Mortgagor may owe the Mortgagee not exceeding P 4,000,000.00 in the aggregate.
- Default & Remedies. Failure to pay any installment of principal or interest when due shall constitute default, rendering the entire outstanding balance immediately due and payable without notice. The Mortgagee may thereupon foreclose this mortgage judicially or extrajudicially under Act No. 3135, adding 25% of the outstanding balance as attorney’s fees.
- Insurance & Taxes. Mortgagor undertakes to keep the property insured against fire and other perils for at least its appraised value, payable to the Mortgagee, and to pay real‑property taxes when due.
- Alienation. Mortgagor shall not sell, lease, or otherwise encumber the property without prior written consent of the Mortgagee.
- Venue. Exclusive venue of any suit arising herefrom shall be Makati City, Philippines.
IN WITNESS WHEREOF, the parties have signed these presents together with competent witnesses.
_________________________ _________________________ JUAN DELA CRUZ ATTY. PEDRO REYES Mortgagor for ABC Bank, Inc.
(ACKNOWLEDGMENT before a Notary Public follows)
8. Foreclosure: Two Routes
| Route | Basis | Main Stages | Typical Timeline | Redemption |
|---|---|---|---|---|
| Judicial | Rules of Court, Rule 68 | Complaint → Trial → Judgment → Sale | 1–3 years (litigious) | 90 days from entry of judgment to pay in full and stop sale; no statutory redemption after auction. |
| Extrajudicial | Act No. 3135 (& Act 4118) | (a) Debt must be in public instrument authorizing sale; (b) 30‑day notice of sale; (c) Auction by sheriff or notary; (d) Certificate of Sale registered within 30 days | 3–6 months (if uncontested) | Equitable redemption up to auction date; statutory redemption within 1 year from registration of the sale only if property is a Philippine homestead/agrarian farm or if mortgagor is a natural person (per jurisprudence). |
➤ Deficiency – If proceeds < debt, creditor may sue for the shortage, unless waived. ➤ Surplus – Goes to junior encumbrancers or back to mortgagor.
9. Cancellation & Release
Upon full payment, execute a Cancellation of Real Estate Mortgage (instrument), pay DST on release (₱20), and register it to cause the annotation “Cancelled per Doc. __; Page __; Book __; Series __.”
10. Taxes, Fees & Typical Costs (Metro Manila guide)
| Item | Basis | Approx. Rate |
|---|---|---|
| Documentary Stamp Tax | NIRC Sec. 195 | ~0.6% of loan (₱20 + ₱10 per ₱5k) |
| Registration Fee | LRA/ROD Schedule | 0.25% of amount secured (min. ₱50) |
| ITF (Entry Fee) | Local ROD | ₱30–₱50 |
| Notarial Fee | IBP Schedule | 1% of loan or by agreement |
| Transfer Tax | None (mortgage is not a conveyance) |
11. Practical & Regulatory Considerations
- Loan‑to‑Value (LTV) ceilings – Banks often cap residential LTV at 70‑80%; rural banks may go lower for agri land.
- BSP Single‑Borrower’s Limit – Limits exposure to one borrower/group (Sec. X326, MORB).
- SPAV & True‑sale – Mortgaged loans may be assigned to Special Purpose Vehicles under R.A. 9182.
- Anti‑money Laundering – Large‑value mortgages require customer due diligence; suspicious transactions must be reported.
- Insurance–Bank tie‑ins – Banks may no longer require borrowers to buy insurance exclusively from a related insurer (BSP C‑950).
- Foreign ownership – Land cannot stand as collateral for foreigners beyond the constitutional 40% limitation; but they may be mortgagees.
12. Common Pitfalls
| Pitfall | Preventive Measure |
|---|---|
| Incorrect TCT number / technical description | Attach certified true copy; double‑check lot & plan no. |
| DST paid late → penalty & surcharge | File & pay within 5 days of signing |
| Unreleased mortgage after payment | Demand release/quitclaim; file affidavit of cancellation if creditor refuses |
| Dragnet clause too broad | State maximum cap to avoid being struck down |
| Failure to insure or pay real‑property tax | Bank may advance payments then tack them onto the loan at higher rate |
13. Comparison: Real Estate vs. Chattel Mortgage
| Feature | Real Estate | Chattel |
|---|---|---|
| Governing law | Civil Code + Act 3135 | Chattel Mortgage Law (Act 1508) |
| Registration | Register of Deeds | Chattel Mortgage Register at ROD |
| Property | Immovables | Movables (includes fixtures treated as personalty) |
| Foreclosure Sale | Sheriff/Notary public auction | Sheriff sale w/ 30‑day notice + ₱400 filing fee |
| Redemption | Limited (see above) | 30 days from sale (Sec. 14, Act 1508) |
14. Recent Judicial Trends
- Strict compliance with Act 3135 notice requirements—defects in notice invalidate foreclosure.
- Dragnet clauses are enforceable only when later debt is clearly contemplated.
- Partial payments close to sale date do not automatically stop foreclosure unless the creditor expressly accepts.
- Separation‑of‑actions rule—after extrajudicial foreclosure, a deficiency suit is a separate action, subject to prescription (10 years).
15. Step‑by‑Step Checklist for a Typical Bank Loan
- Credit approval (bank)
- Appraisal of property → appraisal report
- Title due diligence (CCT/TCT verification, tax clearances)
- Draft & sign loan documents (PN, REM, disclosure statement)
- Notarize & pay DST
- Register with ROD; secure Owner’s Duplicate with annotation
- Insurance endorsement & post‑booking requirements
- Release of loan proceeds (manager’s check, credit to account)
- Periodic monitoring (tax receipts, insurance renewal)
- Release/cancellation when loan fully paid
Conclusion
A Real Estate Mortgage remains the backbone of secured lending in the Philippines. Mastery of its doctrinal foundations (Civil Code), procedural safeguards (Act 3135, Rule 68), and commercial practices (BSP/HDMF guidelines) is essential for bankers, developers, lawyers, and borrowers alike. By observing the proper formalities, accurately drafting the instrument, and understanding the remedies and risks, parties can harness the REM as a reliable credit device while protecting their respective interests.