Mortgages 1
At some point, most people will strive to purchase their own home.
However, to do this, you need to bear the big upfront cost...
Got 327k in your account? NO?
This is where mortgages have been described as the ‘necessary evil’…
Lenders (most often banks), can lend the borrower the necessary fund to make the purchase – GREAT!
Q: Would you however lend a STRANGER such a HUGE sum, with no guarantee that they will pay it back?
I think not…
Lending large sums carries with it a huge risk – After All, banks are not charitable organizations. They are in it for the
profits.
Q: How can lenders protect themselves from the risk associated with lending such big sums?
If only there was something that they could be promised in case the borrower fails to make a repaying…
Something of a permanent nature, which does not lose its value…
Oh wait… LAND
You can’t pack up your land and run away with it – you also can’t hide it in an off-shore account!
Mortgages = ‘security’ for a loan
The security for the loan?
IS The property itself
The land acts as collateral - (in essence to make the borrower a ‘safer bet’) - (Think: This is why banks are willing to give
you a mortgage!)
The security = the land itself
Collateral: something pledged as security for repayment of a loan, to be forfeited in the event of a default.
The mortgages that spring to our mind are acquisition mortgages, where you take out a loan in order to purchase the
property.
However, a mortgage is actually broader than that…
It can be any loan – for whatever purpose – where the property is used as a security.
This is often known as a charge
This commonly happens when people need a loan to start a business, or to re-do their kitchen or make some other form
of an improvement.
The security for the loan is the property itself
The charge = The way in which the mortgage is secured against the property in question.
Mortgages: Terminology
Let’s sort out the terminology before we examine the topic any further…
The mortgagor = borrower
The mortgagee = lender
A mortgage =
The transfer of the legal or equitable interests … FROM the mortgagor (the borrower)
… TO the mortgagee (the lender) The borrower is the one granting the mortgage to the lender.
, Mortgages: The process
Feels counter-intuitive doesn’t it?
The mortgagor grants the lender the rights, in exchange for money to purchase that very property (which they do not
own yet)…
How can they grant rights to a property which they cannot purchase unless they are given the loan?!
A classic that comes first – a chicken or an egg: A property or the loan…
We know 🡪 Mortgage: the mortgagee has a proprietary interest in the property. (This acts as their 'security' for the loan).
Example here: The mortgage term is 25 years
For the term of the mortgage, (i.e. the 25 years): …the mortgagee has a proprietary interest in the land.
On repayment of the mortgage: the mortgagee's interest in the land comes to an end. (i.e. the mortgagee 'drops out of
the equation’, and no longer has a proprietary interest.)
Okay, so the property is used as a security – but how does that actually work?
What sort of rights does the lender have in the property?
Before we can understand the current legal approach to mortgages, we need to look at the history and how these
arrangements used to work…
Mortgages: The Historical Perspective
Mortgages are ‘a tale as old as time’…
The concept of using property as a collateral in order to secure a loan, has been around for at least the last 600 years –
however, back then, the arrangement was a bit different and A LOT more unfair.
The lender would keep the property until he was satisfied with the repayment of the debt – often the exact terms were
not named.
It was even valid for the lender to confiscate profits made from the land…
Luckily, we have somewhat moved on from such an imbalance of power…
Back in the day, the fee simply would be conveyed to the lender, with a clause stating that the borrower may redeem
the property once the loan is paid off.
The clause contained a specific date by which the loan MUST be paid off. Until that date, AT LAW, the lender was
considered the freehold owner.
This therefore gave the lender the right of entry and possession.
They were also entitled to any profits from the land – if those profits were more than the loan, the lender was not
accountable to the borrower.
You think this is bad – it gets worse!
If the loan was not repaid by the date specified, the borrower lost their right to redeem the property.
Imagine the following scenario under the old rules:
You took a loan out for £200k – repaid £190k by the date specified in the agreement. With 10k of the debt remaining,
you would lose ALL the rights to the land.
This meant that the lender could now potentially sell the land for 300k, and make a 290k profit.
Safe to say, it was not fair at all.
At some point, most people will strive to purchase their own home.
However, to do this, you need to bear the big upfront cost...
Got 327k in your account? NO?
This is where mortgages have been described as the ‘necessary evil’…
Lenders (most often banks), can lend the borrower the necessary fund to make the purchase – GREAT!
Q: Would you however lend a STRANGER such a HUGE sum, with no guarantee that they will pay it back?
I think not…
Lending large sums carries with it a huge risk – After All, banks are not charitable organizations. They are in it for the
profits.
Q: How can lenders protect themselves from the risk associated with lending such big sums?
If only there was something that they could be promised in case the borrower fails to make a repaying…
Something of a permanent nature, which does not lose its value…
Oh wait… LAND
You can’t pack up your land and run away with it – you also can’t hide it in an off-shore account!
Mortgages = ‘security’ for a loan
The security for the loan?
IS The property itself
The land acts as collateral - (in essence to make the borrower a ‘safer bet’) - (Think: This is why banks are willing to give
you a mortgage!)
The security = the land itself
Collateral: something pledged as security for repayment of a loan, to be forfeited in the event of a default.
The mortgages that spring to our mind are acquisition mortgages, where you take out a loan in order to purchase the
property.
However, a mortgage is actually broader than that…
It can be any loan – for whatever purpose – where the property is used as a security.
This is often known as a charge
This commonly happens when people need a loan to start a business, or to re-do their kitchen or make some other form
of an improvement.
The security for the loan is the property itself
The charge = The way in which the mortgage is secured against the property in question.
Mortgages: Terminology
Let’s sort out the terminology before we examine the topic any further…
The mortgagor = borrower
The mortgagee = lender
A mortgage =
The transfer of the legal or equitable interests … FROM the mortgagor (the borrower)
… TO the mortgagee (the lender) The borrower is the one granting the mortgage to the lender.
, Mortgages: The process
Feels counter-intuitive doesn’t it?
The mortgagor grants the lender the rights, in exchange for money to purchase that very property (which they do not
own yet)…
How can they grant rights to a property which they cannot purchase unless they are given the loan?!
A classic that comes first – a chicken or an egg: A property or the loan…
We know 🡪 Mortgage: the mortgagee has a proprietary interest in the property. (This acts as their 'security' for the loan).
Example here: The mortgage term is 25 years
For the term of the mortgage, (i.e. the 25 years): …the mortgagee has a proprietary interest in the land.
On repayment of the mortgage: the mortgagee's interest in the land comes to an end. (i.e. the mortgagee 'drops out of
the equation’, and no longer has a proprietary interest.)
Okay, so the property is used as a security – but how does that actually work?
What sort of rights does the lender have in the property?
Before we can understand the current legal approach to mortgages, we need to look at the history and how these
arrangements used to work…
Mortgages: The Historical Perspective
Mortgages are ‘a tale as old as time’…
The concept of using property as a collateral in order to secure a loan, has been around for at least the last 600 years –
however, back then, the arrangement was a bit different and A LOT more unfair.
The lender would keep the property until he was satisfied with the repayment of the debt – often the exact terms were
not named.
It was even valid for the lender to confiscate profits made from the land…
Luckily, we have somewhat moved on from such an imbalance of power…
Back in the day, the fee simply would be conveyed to the lender, with a clause stating that the borrower may redeem
the property once the loan is paid off.
The clause contained a specific date by which the loan MUST be paid off. Until that date, AT LAW, the lender was
considered the freehold owner.
This therefore gave the lender the right of entry and possession.
They were also entitled to any profits from the land – if those profits were more than the loan, the lender was not
accountable to the borrower.
You think this is bad – it gets worse!
If the loan was not repaid by the date specified, the borrower lost their right to redeem the property.
Imagine the following scenario under the old rules:
You took a loan out for £200k – repaid £190k by the date specified in the agreement. With 10k of the debt remaining,
you would lose ALL the rights to the land.
This meant that the lender could now potentially sell the land for 300k, and make a 290k profit.
Safe to say, it was not fair at all.
