What Is a Mortgage?
If you borrow money, your lender may want to hold the title deed to your property to make sure the loan is repaid. A mortgage gives the lender the legal fight to sell the property if the loan (or interest on it) is not repaid within an agreed period.
What does It Involve?
If you are borrowing money to purchase property. you should first obtain written approval for the loan.
The lender, before issuing such approval, will need to be satisfied that:
The value of the property will support the amount of the loan. This will involve the lender getting (at your expense) its own valuation of the property. In most cases lenders insist on a loan not exceeding a certain percentage of the value of the property.
Your income will enable you to meet the loan repayments, including interest.
Even if the loan is approved it may have conditions attached to it. These will normally be stated on the approval letter and must be read carefully.
The lender will prepare the mortgage document for you to sign between the date when Contracts for the purchase are exchanged and the final settlement of the transaction.
Normally the mortgage documents must be signed not later than two weeks before the final settlement date.
The costs of the lender in having the mortgage documents prepared, and later registered on the title to the property after the final settlement date, will be payable by you.
Transaction duty under a mortgage
In New South Wales transaction duty is a State Government tax. It is payable both on the price under a Contract for the purchase of real estate and on the amount of any money being borrowed.
The duty on your mortgage document will often be payable before the final settlement date. If so, this will be stated on the loan approval letter and we will ask you for this.
We can advise you as to the exact amount as it will vary if a lender is taking more than one property (or other assets) as security.
If the property being purchased is your first property and is to be used as your home, you may qualify for exemption from the obligation to pay duty.
OTHER REQUIREMENTS UNDER A MORTGAGE
Most lenders will insist that:
If the loan is generally above 80% of the value of the property mortgage insurance will be needed. This is a policy which covers the lender in the event of illness or incapacity of the borrower to make the mortgage payments. This does not mean the borrower is released from repaying the loan. The premium is payable once only at the start of the loan.
The property is free from any defects such as structures built without council approval, soil contamination, is not being used for a purpose contrary to the local council zoning; and is not subject to a government interest such as a road widening.
You obtain a policy of building and fire insurance on the property, for an amount approved by the lender with the lender’s name recorded on the policy.
The powers of a lender under a mortgage
If a borrower does not make the due repayments under a mortgage, or does other things prohibited under it (such as failing to pay council rates or doing work on the property which is not approved by Council):
The lender must issue a notice giving the borrower time to fix the situation.
This is generally only a short period after which the lender can “foreclose” and sell the property to recover the loan.
This will involve the owner having to vacate and incur further expense, including paying the lender’s legal and selling costs in enforcing its rights.
We recommend that negotiations be entered with a lender before this stage.
Protections for the borrower
A Consumer Credit Code was introduced in 1996.
It requires all lenders to disclose and explain to the purchaser in plain English the effect of the loan, penalties applying under it and the options open to a borrower in the event of inability to repay the loan.
Often lenders will insist on an independent Solicitor’s Certificate being obtained by a borrower as a condition of the loan.
We can provide these Certificates which are acceptable to all lenders. If we are acting for you on a purchase this is included in our charge. In other cases, we will advise you of the cost before meeting. The cost will depend on the complexity of the loan transaction and the security being taken. These certificates, by law, can only be given after a solicitor has witnessed signing of the mortgage documents. This cannot be done over the phone.
What happens when the loan is repaid
The lender will hand back the title deed plus a discharge (or release) of the mortgage.
Arrangements can be made to have the mortgage removed from the title by registering this discharge of mortgage at the government’s Land Titles Office.