A mortgage is a loan in which property is used as collateral. This is a legal agreement between the lender (mortgagee) and the property owner (mortgagor) which secures the loan by allowing the property to become the lender’s security interest. Mortgages allow parties to make purchases larger than they would normally be, as the mortgagee (being the lender) has priority over the title of the property. That is, when the secured property is sold, the mortgagee’s loan must be paid out before proceeds of the sale are applied anywhere else.
Section 74 of the Transfer of Land Act 1958 confirms that the mortgage creates a security over the property by way of granting the mortgagee interest in the land, however, this does not create a transfer of land between the parties to the loan. Section 75 of the Transfer of Land Act 1958 sets out the covenants that are implied in every mortgage. These are as follows:
The mortgagor will meet the repayments to the mortgage within a particular time period, making part payments at regular set intervals until there is no longer any unpaid amount;
The mortgagor will repair and maintain all buildings and any other improvements to the mortgaged land;
The mortgagee has the right to inspect the land ensuring it is in reasonable condition;
The mortgagor will keep the property insured.
Once the full amount has been repaid, a discharge of mortgage can be obtained. Once, discharged, the property is no longer subject to the mortgage and therefore the mortgagee no longer has a charge over the land.
Can you lodge a mortgage?
If you are loaning money to a third party, you may secure your loan by way of a mortgage over their property. However, this will generally only be possible if there is no current mortgage over the property (such as a bank). If there is a mortgage, generally you will need the consent of the first mortgagee to lodge as a second mortgagee over the property. Such consent can be difficult to obtain.
Are there other ways to secure a loan other than a mortgage?
Sometimes, parties will loan money with a charge over the property, secured by way of a caveat. Generally, in the event that a property is being sold, the mortgagee’s interest will be prioritised above a caveator’s interest. However, a loan secured by way of a charge creating a caveatable interest is sometimes preferred due to it being a quicker alternative to a mortgage.
Caution must be exercised when entering into loan agreements of any kind. To speak to an expert about your loan agreement or mortgage, contact ASAP Lawyers on 03 9450 9400.