In a ship mortgage, a shipowner gives a lender (or mortgagee) an interest in a ship as security for a loan. Similar to other types of mortgage, a ship mortgage legally consists of three parts: the mortgage loan, the mortgage document (deed) and the rights derived from the mortgage deed onto money lender. Ship mortgages differ from other types of mortgage in three ways. First, some privileged claims could have a higher ranking over that of mortgagee against the ship. Second, ships naturally move between jurisdictions. And third, a ship is always at risk of partial or total damages at sea. The use of ship mortgages emerged as a widely accepted practice in shipping industry in the 19th century as a major source of finance for ship owners.
Modern forms of statutory mortgages
In United Kingdom, ship mortgages practice traces to the Merchant Shipping Act 1894, the Merchant Shipping Act 1988 and subsequent amendments to the 1988 Act. Paragraph 21 of Schedule 1 to the Merchant Shipping Act 1988 provides that "a registered ship, or a share in any such ship, may be made a security for the repayment of a loan or the discharge of any other obligation; and on production of the instrument creating any such security (referred to in this Act as a mortgage), the registrar of the ship's port of registry shall record it in the register."