By Ravi Nanga
IN the past we examined the procedure with respect to the purchase of a property.
Given the value of property today, it is not uncommon for persons to seek financing in order to acquire property. The most common form of financing is to seek a mortgage from a financial institution.
Simply put, a mortgage is nothing more than a contract between the financial institution and the owner of the property who is borrowing.
Like with all contracts, it is important to properly read the document and ensure that you understand what you are agreeing to. This is even more important in the case of a mortgage, where it is possible that if payments are not kept up to date and an owner is unable to pay their mortgage instalments, the financial institution may be able to obtain possession of the property and sell the property in order to recover the sums that are owing under the mortgage.
Accordingly, for those considering purchasing property and intend to secure a mortgage over the property, it is important to understand the transaction that you are entering into.
A mortgage is simply a loan that is provided by the financial institution in order to assist with the purchase of property, where the owner of the property agrees to pledge the property as security to ensure repayment of the loan. When a person gives a mortgage over his property he is referred to as the mortgagor. The financial institution providing the loan is known as the mortgagee.
Interest in land comprises two components, the legal title and the equitable title. If a person owns property outright, both the legal title and the equitable title belongs to the person.
When a mortgage is obtained over property, what the owner of the property does is to transfer the legal title to the financial institution while retaining the equitable title.
The way a mortgage operates is that the mortgagor promises to pay the loan to the mortgagee in accordance with the mortgage document and once the entire loan is repaid, the mortgagee promises to return the legal title to the mortgagor. When a mortgage is granted, and the mortgagor retains the equitable title, it is said that he retains the equity of redemption, meaning that once he pays off the loan, the legal title will be transferred back to him.
When a mortgage is granted over property, the mortgagee will register the mortgage so that the mortgagor will not be able to deal with the property, by for example seeking to mortgage the property again, or by selling the property.
However, depending on the value of the property and the amount outstanding on a mortgage, it is possible to obtain a second, and even subsequent mortgages in respect of the same property. Once the mortgage is paid off, the mortgagee will release the mortgage thereby freeing up the mortgagor to deal with the property as he so chooses.
A mortgage deed will contain the names of the parties to the mortgage, that is who the mortgagor and mortgagee are. The deed will also contain a description of the property that is being mortgaged, the amount that is being loaned, the rate of interest, the monthly instalment, when the monthly instalment begins and when it is due each month, what will happen in the event the mortgagor fails to pay the mortgage instalment and that the mortgagee will be entitled to sell the property in the event the mortgagor is unable to pay off the entire mortgage.
In addition, there may be a provision for the mortgagee to increase the rate of interest that is payable, that the mortgagor should insure the property during the life of the mortgage, that the mortgagee can add on expenses incurred in relation to the mortgage to what is due under the mortgage and, in the event an instalment is missed, that the entire sum remaining under the mortgage becomes due and owing.
As mentioned above, a mortgage is simply a contract. In the event the mortgagor finds himself in financial difficulty, although the mortgagee has the power to sell the property, the mortgagor can re-negotiate the terms of the mortgage and seek to re-finance in order to prevent the property from being sold. It is important that a mortgagor exercise financial prudence as re-financing comes at an additional cost.
In the event the mortgagor is unable to repay the mortgage and it is necessary for the mortgagee to sell the property in order to recover the proceeds of the mortgage, it is important to note that the mortgagee owes the mortgagor a duty to obtain the best possible price for the property. That is, in the event the amount owed under the mortgage is less than the value of the property, the mortgagee is not allowed to sell the property for only what is due under the mortgage. The mortgagee must sell for the best possible price, and as close to the value of the property as possible. If a sale takes place, and the purchase price exceeds what was due under the mortgage, then the mortgagee must pay over the balance to the mortgagor. In obtaining possession of the property and taking steps to sell the property, any expenses incurred by the mortgagee in so doing can be added to what is due under the mortgage, and will be deducted from the purchase price.
As can be appreciated, entering into a mortgage is an important financial step and exposes a person to serious obligations, which if not taken seriously, can lead to the loss of one’s property. Therefore, if you are contemplating obtaining a mortgage it is advisable that you shop around in order to obtain the best terms possible and seek legal advice in order to ensure that you properly understand the obligations that you are about to undertake by mortgaging your property.
Ravi Nanga is an attorney-at-law
(Please note that this article is intended only to provide general information on the topic being addressed and should not be taken as providing legal advice. In order to be properly advised it will be necessary for an attorney to examine the relevant documents and obtain the necessary instructions before properly advising as to rights and obligations)