Definition
Hypothecation
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Hypothecation is a financial arrangement between willing parties whereby a promise of a loan is given should some form of collateral is pledged.
In terms of a mortgage, property is offered as collateral in exchange for a housing loan.
This means that the property (or asset) is collateralized or hypothecated which can be repossessed should the borrower default.
With hypothecation, a lender is essentially a secured creditor and has the security of assets that back a debt.
This reduction of risk also means that a secured loan granted to a borrower would usually have attractive interest rates.
In a typical mortgage arrangement, a borrower technically owns the property but the lender possess the right to to seize it for foreclosure should the borrower fail to live up to the terms of the loan.
In some markets, lenders can actually use the asset used as collateral by borrowers, as collateral for their own borrowings. This is called rehypothecation.
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