Incidental to acquiring a property is usually obtaining a mortgage. Most of us do not have sufficient funds to buy real estate outright and will rely on a loan from a bank, building society or some other entity to finance the property.
A mortgage is essentially a ‘statutory charge’ in favour of a lender over property which is (usually) held in the borrower’s name. The mortgage secures the repayment of the money loaned and is registered on the title to the property. The loan contract gives the lender the right to sell the property in the event of a default.
Registration of the mortgage protects the lender in that it alerts others who may be interested in the property (such as a potential purchaser) to the existence of the mortgage which must be dealt with prior to a new legal interest being created.
For example, a mortgage will need to be discharged (paid out) before a purchaser acquires clear title to the property.
What are my obligations when I grant a mortgage?
The person granting the mortgage is known as the mortgagor and the person lending the money and securing its interest over the property is the mortgagee. A mortgage is a legal contract between the parties and the secured property is referred to as collateral (a form of guarantee).
A mortgage is a substantial commitment – for most the largest financial commitment they will make in a lifetime. It is important that you are aware of your obligations and rights under the mortgage.
By signing loan documents and granting a mortgage you are liable for regular payments of principal and interest as well as other charges.
The National Credit Code applies to most loans taken by an individual and requires the lender to make significant disclosure regarding all applicable fees and charges under the loan contract.
If you fail to make mortgage payments on time, the lender can charge a higher rate of interest as well as the costs of chasing you for the payments. If you fail to comply with the terms and conditions of the loan the lender can:
- Sue you (or any other borrower) personally;
- Take possession of the property and, after notice, sell it to recover the outstanding amount together with interest and other costs such as legal fees and the costs of maintaining and selling the property;
- If the proceeds of sale do not cover the debt due, sue each of the borrowers personally for the balance.
Importantly, if you are a co-mortgagor, you are all individually and jointly liable for the loan. This means that if one borrower does not pay, the other/s must – each is responsible even though co-borrowers may have different interests in the property.
Mortgagors must maintain the property, take out adequate insurance cover and comply with all relevant laws regarding the property such as the payment of rates. Mortgagee consent must be obtained if granting a further mortgage over the property and for certain long-term leases.
What happens if I can’t pay my loan?
A mortgagee may, after default by the mortgagor, exercise power of sale, obtain possession of the property and / or foreclose on the property.
A power of sale is generally written into the loan contract and allows the mortgagee to sell the property to recover the mortgage debt and associated costs.
A mortgagee taking this course of action must act in good faith towards the mortgagor who is often facing extreme financial difficulties. The property must not be sold under market value. If the mortgagee suffers loss due to the mortgagee acting recklessly, then the mortgagee will be liable.
The mortgagee must also ensure due process is taken before exercising its rights, for example, the mortgagor must be given notice and allowed 30 days to remedy a default before action is taken. Notices must be correctly served and mortgagees must follow strict procedures during the mortgagee sale and in distributing the proceeds.
We recommend obtaining legal advice when borrowing money and granting a mortgage. We will explain your obligations under the loan contract and ensure you understand your rights. We also suggest you obtain good financial advice regarding your loan commitment and borrowing capacity.
If you have a mortgage and are experiencing difficulties in meeting your repayments, we recommend you discuss your situation with your lender to try to reach a solution. Some financial problems are only short term and your lender may be able to accommodate your situation until things improve.
If you are facing significant financial difficulties, we suggest you speak with our property team who may be able to assist in your negotiations with your lender.