Legal Definitions - Welsh mortgage

A Welsh mortgage is an older, less common type of mortgage where the lender takes physical possession of the borrower's property and collects all its rents or profits. Unlike a traditional mortgage where the borrower makes regular payments of principal and interest, in a Welsh mortgage, the income generated by the property itself is used to repay the entire debt, including both the original loan amount and any equivalent of interest.

Key characteristics of a Welsh mortgage include:

• The lender takes immediate possession and control of the property.
• The income (rents, profits) from the property directly repays the loan.
• There is typically no fixed repayment date; the borrower can reclaim the property once the total collected income equals the original loan amount.
• The lender does not have the right to foreclose on or sell the property if the debt takes a long time to repay.

This arrangement is rarely used in modern finance due to the prevalence of more structured and regulated mortgage products.

• Example 1: Commercial Property Loan for Expansion

  A small business owner, Ms. Chen, needs a $150,000 loan to expand her operations but has limited access to traditional bank financing. A private investor, Mr. Davies, agrees to lend her the money under a Welsh mortgage arrangement. Ms. Chen owns a separate commercial building with several tenants, generating $3,000 in monthly rent. Under the agreement, Mr. Davies takes possession of this commercial building and collects all the rental income directly from the tenants. Ms. Chen can reclaim her building once the cumulative rent collected by Mr. Davies totals $150,000. There is no set deadline for repayment, and Mr. Davies cannot sell the building if it takes many years to recover his investment.

  How this illustrates a Welsh mortgage: Mr. Davies, as the lender, takes physical possession and control of Ms. Chen's income-generating property. The income (rent) from the property is directly applied to repay the loan, and Ms. Chen retains the right to redeem her property once the debt is fully satisfied, without a fixed repayment schedule or risk of foreclosure.

• Example 2: Funding for an Urgent Personal Need

  Mr. Rodriguez requires $75,000 quickly for an unexpected medical emergency. He owns a small apartment building with two units that he rents out. A family friend, Ms. Lee, offers to provide the loan through a Welsh mortgage. Mr. Rodriguez grants Ms. Lee the right to manage the apartment building and collect all the rental income from both units. Ms. Lee will continue to collect the rent until the total amount she has received equals $75,000, at which point Mr. Rodriguez can take back full control and possession of his property. Ms. Lee cannot force a sale of the building, regardless of how long it takes for the rents to accumulate to the loan amount.

  How this illustrates a Welsh mortgage: Ms. Lee, the lender, takes possession of the income-producing property. The rental income she collects serves as the repayment for the $75,000 loan. Mr. Rodriguez maintains the right to redeem his property once the debt is repaid through the property's earnings, highlighting the lender's lack of foreclosure rights and the absence of a fixed repayment term.