23 Nov 2017
By Janice Hughes, Director, Aspiring Law
Mortgages, eh. They’re one of life’s bittersweet realities – there’s the immediate relief in securing one … quickly followed by the more sobering reality of servicing the blessed loan.
Of all the legal lingo, the term “mortgage” is one of the most often used, but also one of the most misunderstood.
Janice’s Lesson Number 1: A mortgage on a property and any existing loan are not interchangeable terms – yes, they co-exist, but they are not one in the same.
“Mortgage” is derived from Old French, translating literally to “death pledge”. The term harks way back to the 12th century when this lender-borrower arrangement first hit the legal scene.
Despite the rather ominous translation, the intent behind the early mortgages was not about the borrower being hung, drawn and quartered should the arrangement turn sour. Rather, it spoke to the fact the property would be “dead” to the borrower if the loan wasn’t honoured or, alternatively, the pledge died on the debt’s repayment.
And, nearly 1000 years on, that basic premise remains – as does the confusion around what a mortgage actually is. Regularly, I see clients who are selling a property, and one of the first questions I need to ask is whether there is a mortgage over the property. “Oh, no, we paid that off ages ago,” is a common reply.
Janice’s Lesson Number 2: You might have paid every last penny to your lender, but the mortgage over the property remains until it is formally discharged, which must be done formally through LINZ.
What are you signing away?
Put simply, a mortgage is the security a lender holds over your property. The most commonly used by banks is an “all obligations mortgage”. Much as its name suggests, under this agreement, your lender can use your property as security over anything you’ve borrowed from them. Take note: that’s not just your home loan.
One of the perils for the uninitiated is unknowingly agreeing that your lender has dibs on your property, even though it might be your credit card payments, for example, you’ve defaulted on. There’s a big warning for guarantors with mortgages, too. If your mortgage is at the same lending institution as the debt owed by the person you’re going guarantor for, guess what? If they default on their loan payments, the lender can come after your property to claim their dues.
The other regular mortgage type is “fixed sum”, which is predominantly used by private lenders and attached to a particular loan, rather than all your borrowing.
The nitty gritty
In the heady days of new home ownership, the fine print of a mortgage agreement might well go unread. Sure, everyone knows you’ve got to keep up with the loan repayments, but look a little deeper, and there are a raft of other not so well known, but potentially costly, dos and don’ts.
Janice’s Lesson Number 3: To give you just a few examples, do pay your rates and other property-related outgoings, maintain the property and comply with the Resource Management and Building Acts. Don’t get underway with any major changes to the property without first notifying the bank, or take out other loans without your home loan lender knowing all about it.
Fail to comply, and it’s all power to your bank. Get behind in your rates, say, and your lender can dip into your mortgage account to pay them. Start defaulting on loan repayments to the extent your banker gets nervous, and you’re potentially looking down the barrel of a Property Law Act Notice.
This provides for a specific period – of not less than four weeks – to cough up any arrears, or, more commonly, the full amount of the loan.
Let’s face it, anyone can face sudden redundancy, illness or one of life’s many other challenges that strangle cashflow – and home loan obligations.
Avoiding ostrich syndrome
It doesn’t take many missed payments, and you’re not only behind, but copping penalties and watching your equity shrivel to boot. If you feel like you’re in for a lean patch due to some unforeseen hardship, the time to contact your bank is now. Generally, banks will try to be accommodating – remember it’s in their interests, too, for you not to hit the skids.
Usually, mortgagee sales don’t bring the best results for either the bank or the distressed borrower, because properties can sell at lower prices. First, potential buyers know the pressure’s on, and second, the property won’t come with the usual warranties, leaving the vendor with no comeback should there be problems down the track.
If you’re just beginning to feel the pinch, a legal helping hand that many people aren’t aware of is contained in the Credit Contracts and Consumer Finance Act, and compels lenders to make changes to loan contracts on applications by borrowers who meet the criteria. That can mean they rejig your payment schedule. But there’s a catch. You must exercise this right before missing payments, otherwise this provision offers no protection at all.
Janice’s Lesson Number 4: The key is, if trouble’s brewing, don’t bury your head in the sand and dawdle. Even in more serious situations, where you can’t afford to keep your property, taking decisive, measured action can mean the difference between you selling your own house on your terms, or being left completely at the mercy of a mortgagee sale.