Hypothecation: The Prepayment and Acceleration Clause

If you have an hypothecation mortgage, then you may already know about the prepayment and acceleration clauses. There are clauses like these written into most mortgages, simply stating when the borrower can pay off the mortgage, or increase payments to reduce the amount of time left on the mortgage, or allowing the lender to demand payments sooner than expected. Both of these clauses can be applied in different ways.

The Prepayment Clause

This clause is often used by the borrower to pay more of the loan off more quickly, so that they accrue less interest. If there is no prepayment clause in the mortgage, then the lender could charge them a penalty. By including the prepayment clause into the hypothecation mortgage, the borrower is able to pay early without incurring a penalty.

The Acceleration Clause

This is a clause used by the lender to cause the borrower to prepay part or all of the loan. The lender does not have to use this clause all the time, but can apply it if the borrower has defaulted for a certain period, or if there is an increasing amount of debt on the mortgage due to late payments, interest rates, and other problems. This is a practical way of enforcing payment without foreclosing on the mortgage.