What is a Welch Mortgage?

In a Welch mortgage, the debtor who owes money to another grants that other person a security interest, called an "estate," in real property. The debtor is called the mortgagor, and the person to whom he or she grants the Welch mortgage is called the mortgagee. The estate that the Welch mortgage grants is the right to possession of the mortgaged property until the debt is paid in full, during which time the mortgagee takes all rents and other profits from that property.

This is quite different from a normal mortgage, where the mortgagee keeps possession of his or her property. The mortgagor in a normal mortgage is obligated to pay the mortgagee an agreed-upon payment, and failure to do so allows the mortgagee to foreclose on the property and take possession of it. The mortgagee can then sell the foreclosed property to obtain the money that is owed. In a Welch mortgage, however, the mortgagee has the possession and does not receive a payment from the mortgagor directly. Welch mortgages therefore would only work for real property that can be rented to another or used in some other profitable way, so that the mortgagee can obtain the money to repay the debt owed.

The Welch mortgage is similar to a vivum vadium, or "living pledge." In a vivum vadium, however, the rents and profits are applied both to interest and to the principal of the debt. On the other hand, in a Welch mortgage, there is no account made of the rents and profits. The mortgagee keeps all the money as if it were interest. The principal of the debt is never reduced unless the mortgagor makes separate payments to pay it off.

In a Welch mortgage, there is no set term for the expiration of the mortgage. The mortgagee keeps possession of the property until the debt is paid in full. The mortgagor is not responsible for repayment, and the terms of the Welch mortgage will not include a personal covenant to repay the debt, which typically is found in most normal mortgages.

The mortgagor in a Welch mortgage has a right of redemption. That means that he or she can take back the mortgaged property by paying the debt in full. The mortgagor has the right to pay back the principal of the debt at any time, and the mortgagee's estate terminates.

Welch mortgages are a financing device that are rarely, if ever, used in modern financing. They were always more prevalent in the United Kingdom than in the United States. They are sometimes referred to as Welsh mortgages.