How to protect the mortgagee's interests

The mortgagee may protect his interests in many different ways. Which alternatives or combination of alternatives he will choose, will depend on the mortgagee's evaluation of the borrower’s creditworthiness.  Usually, the loan is secured by a mortgage on the vessel covering the total outstanding principal amount at any given time, plus interest on the loan for an agreed period which may vary from six months to one and a half years. The mortgagee will also require that the value of the mortgaged vessel never fall below the outstanding principal amount plus interest as aforesaid, plus an additional margin usually set at 30% or 50 %.  If the value of the mortgaged vessel falls below the required minimum value (and the borrower does not supplement the deficit by granting additional securities), the mortgagee will normally be entitled to terminate the loan and demand payment of the total outstanding amount together with interest and costs, if any.  In many instances, the mortgagee will also require collateral security by way of a pledge of other assets, assignment of charter hire or a bank guarantee.  Thus, the mortgagee's interests are generally well protected by the provisions of the loan agreement, the mortgage and the collateral security provided by the borrower.

One risk that the mortgagee faces is the ship's value falling below the minimum required under the loan agreement, in which case the loan will be partially unsecured.  The collateral security may compensate for the fall in the vessel’s market value, but the mortgagee will still be exposed because he will then have to depend solely on the collateral security for the portion of the loan that also used to be covered by the lost value of the vessel. However, the mortgagee always bears this commercial risk. Such commercial risk may be protected by a credit insurance, which is comparable with a bank guarantee.