Mortgages
Sunday, 5 December 2021 16:25
What is a mortgage?
- 'Dead pledge'
- The use of land as security for an obligation
- Normally the obligation is to pay money, often to buy the land in question
- The point is that if you don’t pay, you lose the land
Why a mortgage?
- Land is very effective as a kind of security
- Effective way of turning assets into cash
- Also could be a type of investment
Mortgagor - borrower (usually also the buyer of the property)
Mortgagee - lender (normally a bank or building society)
Security - forfeit if the obligation is not fulfilled (normally the land)
Charge - standard modern form of mortgage
Pledge - old word for security
Common uses of mortgages
- Buying expensive things
○ Houses, shops, factories, ships, machinery etc
- Secure form of investment
○ Guarantees payments
Common issues
- How to balance the different rights and interests?
- What if the land loses value?
- How can the lender protect their interests?
- What can the borrower do if the lender does things to protect their interests?
- Are there any limits to the terms the lender can impose?
Role of equity
- Mortgage at common law = strictly follow the terms or lose
○ If there is a small slip you could lose your land
- Equity of redemption - rebalances the position between borrower and lender
Formalities
- A legal mortgage
○ Use a deed (s 52 LPA 1925)
○ Register it (s 27 LRA 2002)
○ It is equitable until registered
- An equitable mortgage
○ Don’t - legal is better
○ Could be a result of forgery or formalities failure
○ Equitable interests can only have equitable mortgages
Types
- Instalment/repayment mortgage
○ Traditionally a 25 year term for a house
○ Monthly payments to repay the amount borrows
○ Plus interest
○ After 25 years, the mortgage is repaid
- Endowment /interest only mortgage
Monthly payments made to cover the interest on the loan
Land Law Page 1
, ○ Monthly payments made to cover the interest on the loan
○ Other investments will hopefully repay the mortgage
- Overdraft mortgage
- 'Islamic mortgage'
Equity in the property
- Mortgage debt is actually a £sum - capital plus interest
- Customary to analyse land in fractions or percentages
- For example - if the house is 250k and we have paid off 100k, we equitably own 40% of the
property
Negative equity
- Usually house prices increase over time
- Mortgage debt becomes a smaller proportion even faster
- House prices could also fall
- Mortgage debt will become a larger proportion
○ For example, house is 250k
○ Have a 225k mortgage loan
○ Your house is now only worth 200k
○ So you owe the bank more than your house is worth
○ This is negative equity
Equity of redemption
- Lenders tend to create ever more elaborate mortgages with more and more fringe benefits
(makes a mortgage more like a conveyance)
- Equity looks to the substance not the form - once a mortgage, always a mortgage
- Equity insists that the borrower is the true owner and they have a right to redeem
- Equity of redemption is all of the borrowers rights that are left
Loan to value ratio
- House for 200k
- Sold the house for 180k
- If you had a 100% mortgage then you would owe the bank 20k
- If you had a 60% mortgage then you would be able to keep 60k
- If you had a 90% mortgage then you would owe all your sale proceeds to the bank
Legal date to redeem
- Lender sets a legal date that they want the loan to be repaid by, with a view to foreclosing if
not
- Equity says once a mortgage always a mortgage
- Could allow borrower to pay up very late
- So the lender sets the legal date very early - sometimes after a month or two which is clearly
unrealistic
- When will equity allow redemption?
Limits on borrower sale / lease
- Lender is likely to want a veto on these - only with the lenders consent
- Court can override the sale - s 91 LPA
Variable interest rates
- May start as fixed but can vary
LPA implied terms re sale
- Includes default terms
- Sale ss 101 ff is especially important
Possession and sale by lender
- Lenders will often include their own terms about possession
Land Law Page 2
Sunday, 5 December 2021 16:25
What is a mortgage?
- 'Dead pledge'
- The use of land as security for an obligation
- Normally the obligation is to pay money, often to buy the land in question
- The point is that if you don’t pay, you lose the land
Why a mortgage?
- Land is very effective as a kind of security
- Effective way of turning assets into cash
- Also could be a type of investment
Mortgagor - borrower (usually also the buyer of the property)
Mortgagee - lender (normally a bank or building society)
Security - forfeit if the obligation is not fulfilled (normally the land)
Charge - standard modern form of mortgage
Pledge - old word for security
Common uses of mortgages
- Buying expensive things
○ Houses, shops, factories, ships, machinery etc
- Secure form of investment
○ Guarantees payments
Common issues
- How to balance the different rights and interests?
- What if the land loses value?
- How can the lender protect their interests?
- What can the borrower do if the lender does things to protect their interests?
- Are there any limits to the terms the lender can impose?
Role of equity
- Mortgage at common law = strictly follow the terms or lose
○ If there is a small slip you could lose your land
- Equity of redemption - rebalances the position between borrower and lender
Formalities
- A legal mortgage
○ Use a deed (s 52 LPA 1925)
○ Register it (s 27 LRA 2002)
○ It is equitable until registered
- An equitable mortgage
○ Don’t - legal is better
○ Could be a result of forgery or formalities failure
○ Equitable interests can only have equitable mortgages
Types
- Instalment/repayment mortgage
○ Traditionally a 25 year term for a house
○ Monthly payments to repay the amount borrows
○ Plus interest
○ After 25 years, the mortgage is repaid
- Endowment /interest only mortgage
Monthly payments made to cover the interest on the loan
Land Law Page 1
, ○ Monthly payments made to cover the interest on the loan
○ Other investments will hopefully repay the mortgage
- Overdraft mortgage
- 'Islamic mortgage'
Equity in the property
- Mortgage debt is actually a £sum - capital plus interest
- Customary to analyse land in fractions or percentages
- For example - if the house is 250k and we have paid off 100k, we equitably own 40% of the
property
Negative equity
- Usually house prices increase over time
- Mortgage debt becomes a smaller proportion even faster
- House prices could also fall
- Mortgage debt will become a larger proportion
○ For example, house is 250k
○ Have a 225k mortgage loan
○ Your house is now only worth 200k
○ So you owe the bank more than your house is worth
○ This is negative equity
Equity of redemption
- Lenders tend to create ever more elaborate mortgages with more and more fringe benefits
(makes a mortgage more like a conveyance)
- Equity looks to the substance not the form - once a mortgage, always a mortgage
- Equity insists that the borrower is the true owner and they have a right to redeem
- Equity of redemption is all of the borrowers rights that are left
Loan to value ratio
- House for 200k
- Sold the house for 180k
- If you had a 100% mortgage then you would owe the bank 20k
- If you had a 60% mortgage then you would be able to keep 60k
- If you had a 90% mortgage then you would owe all your sale proceeds to the bank
Legal date to redeem
- Lender sets a legal date that they want the loan to be repaid by, with a view to foreclosing if
not
- Equity says once a mortgage always a mortgage
- Could allow borrower to pay up very late
- So the lender sets the legal date very early - sometimes after a month or two which is clearly
unrealistic
- When will equity allow redemption?
Limits on borrower sale / lease
- Lender is likely to want a veto on these - only with the lenders consent
- Court can override the sale - s 91 LPA
Variable interest rates
- May start as fixed but can vary
LPA implied terms re sale
- Includes default terms
- Sale ss 101 ff is especially important
Possession and sale by lender
- Lenders will often include their own terms about possession
Land Law Page 2
