Hypothecation Agreement

The hypothecation agreement is mostly made for movable assets where the charge of the asset remains with the loan provider and the possession remains with the borrower.

It is a contract that contains features (and rules) to cover the definition, insurance terms (where the provider ensures the asset is in great condition),

Inspection rules -  rights of each party (where the lender has the right to check out the asset before accepting the offer),

The key provisions - in case of default like sale realization terms, the liability of each party, jurisdiction, etc.

It has provisions to protect both parties as is offered at a lower interest rate, and in case of default, the lender can seize the asset using the rights.

It can be given in the case of vehicle loans or commercial investment property loans or as a consumer buy-to-let mortgage, where the ownership rights remain with the bank. If the borrower fails to pay back on time, the bank can sell the vehicle to receive its dues. 

In case one wants to buy gold in the UK, the pledge can be used instead of hypothecation, as the asset is held by the bank/lender itself.  

It is not the mortgage deed as the borrower pledges, the property is taken as loan security and such agreements are not long-lived like mortgages.

Such methods can be adopted by financial firms for stocks and bills receivables where the banks can also use the method of margin lending for security trading where the investor who chose to buy on margin agrees that the securities can be sold if they issue a margin call that the investor cannot meet.

There are certain risks in such investment agreements where the traders may double up hypothecation using the same collateral.