LEC 9: MORTGAGES OVER REAL PROPERTY
Financing:
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Types:
o Standard variable rate loan
o Low start home loan
o Fixed rate loans
o Flexible Mgs
Standard variable rate loan:
o Regular repayments of interest + capital over 20-25yr period
Low start home loan:
o Regular repayments of interest + capital over 20-25yr period
o Low repayment amounts  increase over period
Fixed rate loan
o Interest only repayments
o Usually only fixed for first 3-5yrs.
Flexible Mg:
o Interest only repayments
o Mgor can use as much of the approved loan amt as needed – can repay/draw at any time
o Monthly repayments depend on amount drawn at that time
Mortgages
Mg: Mgor gives Mgee a security over the Mgor’s property (usually land) in return for a loan.
Mgor covenants to repay the loan periodically
Mgee has rights against the Mg prop (exercise power of sale) and Mgor (right to sue)
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Legal fee simple is given to Mgee.
Mgor retains equity of redemption (contractual right to have prop reconveyed to Mgor after
repayment)
Torrens Title
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Statutory charge in favour of Mgee.
Legal Mg (stat charge) is created by registering Mg under s56 RPA:
o Whenever any land or estate or interest in land under the provisions of this Act is intended to
be charged with, or made security for, the payment of a debt, the proprietor shall execute a
mortgage in the approved form.
Effect: as security but NOT transfer: s57
Sol may execute Mg for Mgee, but not for Mgor.
Mgor remains reg proprietor.
o Can give more Mgs: 2nd+ Mgs impose further stat charges (Sch 2)
o Unless express term in 1st Mg not to.
Preparing the Mortgage
Mgee’s sol prepares Mg.
Investigation of Title
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Mgee’s sol must investigate the Title – protect Mgee’s interests in case Mgor defaults.
• Obtain searches, inquiries, requisitions, survey, final search etc.
Mgor’s sol must provide particulars of Title to Mgee’s sol
• Ensure any Mgee preconditions satisfied (well before settlement – if purchase) e.g. insurance,
building certificate.
The Terms of the Mortgage
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Use approved RPA form and incorporate terms of filed memo
• Mgee may choose to incorporate terms in Memorandum Q860000 at LPMA (standard terms)
• Some Mgee sols will prepare/file their own memo
• Banks etc usually have their own filed memo
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• Or won’t incorporate – will just attach terms to form.
The Loan Agreement
• Gen: separate loan agts (loan approval letter)
• Terms may also be incorporated in the loan agreement
• Specific to situation: principal amount, interest rate, specify security, repayment arrangements, fees
(termination/bank), conditions precedent to advance, insurance
Drafting Mortgage Covenants
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Objectives:
– Provisions should be clear & unambiguous
– Capable of being read & understood by solicitors and lay people
– Not too long
– In plain English
– Cover current/future needs of parties
– Fair to both parties
• Unclear covs may be construed against the Mgee: Direct Acceptance Corp Ltd v Hage & Ors 1989
• Consider if Consumer Credit Code applies.
• Next year, Australian Consumer Law – more stringest re “fair”
Interest rates:
 Reducing principal: interest calculated on amount still owing (interest reduces). Mgor pays principal
plus interest over time.
 Interest only: interest (fixed/variable) on amt borrowed for term and only pays principal at end of term.
 Flat interest rates: interest paid on whole of loan amt for whole of term (even though principal is
reducing).
Mortgage covenants include:
• Repayment of the principal sum
• Payment of interest – beware of imposing penalty interest
• Insurance – must cover mortgagee’s interest in the property, with covenant to pay premiums
• Repair provisions
• Default provisions
Early Repayment:
 If loan is payable “on demand”, Mgor may repay at any time (before due date)
 If loan is fixed term, Mgor cannot repay it before contractual date of repayment (even if Mgor tenders
interest for entire term).
 Gen: can make early repayment with interest of unexpired part of term: s93 CA
 If Mgee prepared to accept less interest, this must be expressed in clear terms.
 As Mgor’s sol – must advise about early redemption of Mg.
 Can make payments before they are due: s24 CCC – unless credit contract prohibits it.
o Contract cannot prohibit repayment of entire debt before due date: s24(4) and s75(1)
o Amount payable (if early) is calculated in s75(2)
o Usually include interest up to redemption and early termination charges (if specified in
contract)
Interest
 Mg provision which sets a higher interest rate for overdue periods  penalty interest  VOID: s28
CCC and common law
 But, Mgor can covenant to pay higher interest UNLESS pay on time  Mgee accept lower interest.
 If default interest rate apply – must comply with s15(J) CCC: s28(1) CCC
Insurance:
• Mgee’s sol must ensure Mgee’s interest is properly covered by insurance of improvements against
damage/loss
• Mgor may choose own insurer so long as it is reputable.
• Any requirement exceeding the permitted insurance is void: s133 CCC
• If Mg outside CCC, Mgee may require further insurance:
 Life insurance eg. if Mgee relying on Mgor’s income earning capacity to pay back Mg
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Guarantee insurance e.g. in case Mgor default
Repair:
 Mgor agrees to maintain and protect prop (good state of repair)
 Usually provides that Mgee can require Mgor to carry out repairs and inspect
 Usually provides that Mgor cannot pull down any part of prop without Mgee’s consent
Simple example of Default provision
Events of default
At the option of the Lender, the outstanding balance of the Principal Sum will become immediately due
and payable by the Borrower to the Lender, despite any previous delay or waiver by the Lender, if:
a. the Borrower does not pay (within 14 days of the due date) any money payable under this document;
b. any Event of Insolvency occurs;
c. the Borrower breaches any provision of this document; or
c. the Borrower dies.
Default
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Default may occur through:
– Failure to make repayments
– Failure to observe other obligations eg failure of payment of rates & taxes, repair or insure
Power of sale is implied
– OST Mg: s109(1) and s110(1) CA – unless contrary intention
– Reg TT Mg: s 109(5) and s110(4) CA; ss57(2)and 58 RPA
To exercise POS:
– Default
– Must give Notice to Mgor to comply (usually 1 mth): s57(3) specifies notice contents
– POS via auction – good faith, cannot sell to self/agent
– Transfer (special form for Mgee) signed by Mgee pursuant to POS
Proceeds of sale distributed: s58(3)
– First to paying Mgee’s expenses of sale
– Then, pay money owed to Mgee
– Thirdly, pay subsequent Mgees in order of priority
– Last, any surplus to go to Mgor
CF foreclosure:
– S61-62 RPA: must be default of payment of principal sum + interest for 6mths+
– Mgee must offer for sale
– If highest bid doesn’t meet Mg money owed – no sale
– Mgee must issue notice to Mgor, any caveators, any other Mgees – to foreclose
– Mgee goes to RG for order to foreclose: Mgee becomes reg prop (pay all rates/taxes) until
they decide what to do with prop (maybe keep and sell later)
• But note: NO right to sue Mgor for money
Defences –
– unconscionable contact; undue influence;
– Contracts Review Act 1980 (NSW);
– CCC: harsh provisions?
– TPA 1974 (Cth); FTA 1987 (NSW) (note Competition Consumer Act – Sch 1 from 2011 Jan)
Right to redeem before due date
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Common law - when the mortgage is for a fixed term, the mortgagor has no right to repay the loan
before the due date
Conveyancing Act s93 - a statutory right of early repayment with interest for the entire term
Express Mg term - the mortgagee will accept early repayment with interest less than the full term
(NOTE: must look at Mg contract)
If CCC – s75 provides automatic right!
 Debtor has right – only pay credit amount, interest charges and any termination charges IF
provided in contract.
Power of Attorney by Mortgagor
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Usually: provisions where Mgor appoints Mgee irrevocable POA for certain purposes
For whole of Mg
Empowers Mgee to carry out covenants and agts, which should have been done by Mgee.
Need for Mortgagee’s Consent to Leases
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Usually: provisions prohibiting Mgor from leasing prop without Mgee’s consent
Also: s53(4) RPA – lease (without Mgee’s consent before registration) is not binding
If leased without consent  breach of Mg
Also applies to consent of subMgs (2nd Mgs).
Duty
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Duty on a mortgage: s 204-228 Duties Act
Mgor is liable
Stamp duty must be paid within 3 months of first execution
Rate of duty is:
– $5 for first $16,000 secured
– $4 per $1000 thereafter
Phased abolition
• Owner occupied housing: 1 Sept 2007
• Investment housing – where Mgor is natural person: 1 July 2008
• All Mg duty: 1 July 2012 and s 203A Duties Act
Guarantees
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TT Mg may contain covenant that 3rd person (Guarantor) pay Mg money if Mgor defaults.
Guarantor doesn’t get any legal/equitable interest in land.
Yerkey v Jones (1939) 63 CLR 649:
2 branches:
– Where H exerted UI over W to get guarantee, Creditor is not protected unless W was given
independent legal advice before entering into guarantee (actual UI)
– If W’s guarantee is procured by H without understanding its effects, signs and Creditor accepts
without dealing directly with W  prima facie right to set aside guarantee (failure to explain)
Garcia v National Australia Bank Ltd (1998) 194 CLR 395
– HC: W relied on Yerkey v Jones – set aside.
– W had less than 1 min of advice and no explanation of transaction
– W knew what a Gua was and what she was doing, but didn not know about “all moneys
clause” in the Mg
– Onus on Mgor to show independent legal advice
Discharge of Mortgage
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Upon payment of debt on date fixed by Mg  Mgor is entitled to receive discharge from Mgee.
Upon registering discharge  land ceases to be subject to stat charge: s65(2) RPA
Can be discharged in whole or part (eg. strata)
Mgor bears costs of discharge.
Discharge of Mortgage (RPA form) s65
– Is prepared by the Mgee’s solicitor
– Is signed by the Mgee (not by Mgor)
Variation: s91CA – RPA dealings (reg)
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Increasing/decreasing the rate of interest (or principal sum)
Extending or shortening term
Postponement: s56A RPA – RPA dealings (reg)
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Allows relative priorities between Mgs to be altered (multiple Mgs)
Eg. comp gets 2nd Mg, but condition of 2nd Mg is that they are 1st Mgee and the orig 1st Mgee agrees
Submortgages: s12 CA – RPA dealings (reg)
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Assignment of original Mg debt
The Consumer Credit Code (National Leg)
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CCC (template leg) adopted by Consumer Credit (NSW) Act 1995
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Applies to all consumer credit contracts (eg. credit card, guarantees, personal loans and Mgs)
Applies to the provision of credit when (s6 CCC):
– Debtor is a natural person, ordinarily resident in NSW (or a strata corporation)
– Credit is provided (or intended to be provided), wholly or predominantly, for personal,
domestic or household purposes
– Charge is made for providing credit
– Credit provider provides credit in course of (or incidentally) to any business
– Regardless of amount or interest rate
Exceptions (CCC doesn’t apply):
– Short term credit: s7(1)
• Total period is less than 62 days
• Max amount of credit fees doesn’t exceed 5% of credit amount
• Max amount of interest doesn’t exceed X (amount payable if 24% pa)
– Continuing credit where only account charges are payable: s7(3):
• Continuing credit contract
• Only charge is periodic/fixed charges, which does not vary according to credit amount
IF CCC applies:
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CCC covers mortgages, guarantees related to a credit contract caught by CCC
CCC has requirements concerning:
– Form of mortgage – written & signed (plain English)
– Identification of the subject property
– Assignment /disposal by mortgagor
– Legal relationship between credit provider & any guarantor – can’t prohibit early repayment
– Pre-contract disclosure statement - interest rate etc
Hardship & unjust transactions under CCC
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S66-69 hardship provisions:
o Allow debtor to apply for a change in case of hardship
o Debtor (unable reasonably bcos of illness, unemployment or other reasonable cause) to meet
Mg obligations may apply first to Mgee then CTTT to vary terms of contract: s66(1)
S70-74 a debtor, mortgagor or guarantor may apply to the CTTT for a review of unjust or
unconscionable transactions or interest
o Debtor, Mgor, Gua may apply to CTTT to reopen an unjust transaction: s70(1)
o CTTT must have regard to public interest and all circ of case: s70(2)
May set aside contract or part of contract
Civil penalties may apply for breach by credit provider
Solicitors advising on loan/security documents
Borrowers/guarantors often need independent legal advice – rebut assertion that Mgee misrepresented
or used undue influence.
Practice when advising proposed signatory to loan/security doc: PR 45 (Solicitors Rules)
45.3 Application of this Rule
45.4 Independence of the Advising Solicitor
45.5 Identification of Proposed Signatories of Documents
45.6 Advice
45.7 Evidence of Advice
45.8 Acknowledgment by Signatory
45.9 Consent by Signatory to Advice
Evidence of advice (45.7) is a Statutory Declaration in the form (Sch 1 of rule)
o Mgor makes stat dec
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