When banks, second tier lenders, and other financial institutions agree to lend money to help finance a real estate purchase, it will usually be on the condition that the borrower’s obligations under the loan (or the obligations of a guarantor) will be secured by a mortgage over the land being purchased. Most people do not have the financial means to buy land without this type of mortgage-backed lending.
People sometimes talk about “paying down the mortgage”. But the mortgage is not the debt to the lender that needs to be repaid. The mortgage is the lender’s security or collateral in the event the debt is not repaid in accordance with the loan agreement. If that occurs, the mortgagee can take steps to enforce the mortgage, including by selling the property (a “mortgagee sale”) and applying the net sale proceeds in payment of the debt.
The borrower (mortgagor) grants the mortgage in consideration of the lender (mortgagee) advancing funds under the loan agreement. The agreement to mortgage takes effect as a legal contract that is related to, but distinct from, the loan agreement.
It is worthwhile noting here that while the public may be more familiar with mortgages over land, mortgages can also be granted over personal property. Such mortgages provide a security interest in the relevant collateral for the purposes of the Personal Property Securities Act 1999. That Act contains the rules that govern the creation, priority, and enforcement of mortgages over personal property.
However, because most people associate the term “mortgage” with land, we will continue to focus on mortgages over land.
The terms of the mortgage will usually be set out in a document called a memorandum of mortgage. This memorandum, which is often tailored to the individual lender, will contain the express terms and conditions of the mortgage contract between the parties.
Mortgages are also governed by the Property Law Act 2007. That Act contains rules about the enforcement of mortgages, as well as terms that will in some cases be implied into the mortgage.
While it is possible to have an unregistered mortgage, most lenders will want to register the mortgage on the title to the land. This is because a registered mortgage will generally take priority over an unregistered mortgage, even if the unregistered mortgage was created first. It also means the mortgagor can take advantage of the all the benefits of registration provided by the Land Transfer Act 2017.
Registration is achieved by a mortgage instrument being registered on the title. That instrument will refer to the parties, the memorandum of mortgage, the nature of the obligations being secured (all obligations or something else), and a “priority amount” (discussed below). The instrument will be registered at the same time as the transfer instrument under which the borrower acquires title to the land.
A priority amount is the amount for which the lender will have priority over any other lower ranking mortgage that might be registered on the title. The amount is usually set at a level that is much higher than the initial advances under the loan agreement. This is to factor in the possibility of additional lending, default interest, collection costs, and other amounts to which the lender would ideally like to have first-ranking priority in case of a default by the borrower.
As expert conveyancing solicitors, we routinely act for borrowers wishing to obtain mortgage-backed finance for their land purchases. When such finance is approved, we will usually be asked to act for the lender for the limited purpose of preparing, explaining, and attending to the execution of the loan documents, and attending to registration of the mortgage on settlement of the transaction.
If you need a lawyer to assist with purchasing land using mortgage-backed finance, get in touch with our specialist property team here.