Mortgages, consumer leases and other finance products

The definition of a mortgage in the National Credit Code (NCC) is wide (s 204(1) NCC). In practice, a borrower under a mortgage agreement nominates property that may be taken and sold by the lender if the borrower does not repay the money loaned.

Typically, credit providers require a mortgage over residential property as a condition of providing a home loan, or a mortgage over a car for a car loan. However, not all mortgages are lawful. As well as banning certain types of mortgages, the NCC can provide relief from ‘unjust’ mortgages (defined in s 76 NCC) (see ‘Unjust contracts’ in ‘Varying, re-opening and terminating credit contracts‘).

A mortgage is void to the extent that it secures an amount exceeding the sum of the debtor’s liabilities under the credit contract and any reasonable enforcement expenses associated with the mortgage (s 49(1) NCC). Similarly, a mortgage is void to the extent that it seeks to secure an amount in excess of the guarantor’s liability under the guarantee and any reasonable enforcement expenses of the mortgage (s 49(2) NCC) (see ‘Guarantees’).

A mortgage that does not describe or identify the property that is subject to the mortgage is void (s 44(1) NCC).

A provision in a mortgage that charges all the mortgagor’s property (i.e. an all-property mortgage) is also void (s 44(2) NCC).

A provision in a mortgage that allows the credit provider to create a mortgage over property that will or may be acquired by the mortgagor after the mortgage is entered into is void (s 45(1) NCC).

However, this does not apply to provisions in a mortgage where:

• the property to be acquired will be obtained wholly or partly with the credit provided under the credit contract secured by the mortgage (s 45(2)(a) NCC);
• the mortgage relates to property that is described or identified in the mortgage (s 45(2)(b) NCC); or
• the mortgage relates to goods that will be obtained as a replacement for, or as additions or accessories to, other goods that are subject to the mortgage (s 45(2)(c) NCC).

A mortgage cannot have the effect of securing goods supplied from time to time under a continuing credit contract, unless those goods are specifically identified (s 46(1), (2) NCC).

Mortgages that cover all debt owed by a debtor to the credit provider are allowed under the NCC, provided certain requirements are met (s 47 NCC).

Credit providers are prohibited from entering into a mortgage to secure obligations under a credit contract where the mortgagor is not a debtor under the contract or a guarantor under a related guarantee (‘a third-party mortgage’) (s 48(1)–(2) NCC).

A third-party mortgage that does not comply with section 48 of the NCC is unenforceable (s 48(3) NCC). A party to the mortgage may apply to a court for an order that the credit provider discharge the mortgage (s 48(4) NCC).

For contracts entered into after 1 July 2010, section 50(2) of the NCC prohibits mortgages over essential house­hold property – as defined in section 116(2)(b)(i) of the Bankruptcy Act 1966 (Cth) and regulation 27 of the Bankruptcy Regulations 2021 (Cth).

For a list of protected items, see ‘Warrant to seize property’ in ‘Enforcement of court orders‘ in Chapter 5.2: Are you in debt?

The exceptions to this rule are:

• where the mortgagee supplied the goods to the mortgagor as part of the mortgagee’s supply business (s 50(2)(a) NCC); and
• where the mortgagee is a linked credit provider of the person who supplied the goods to the mortgagor (s 50(2)(b) NCC).

Section 50 also prohibits mortgages over:

• employees’ remuneration (s 50(1) NCC); and
• tools used to earn an income (s 50(5) NCC) – if the total value of the tools is not more than the relevant limit worked out under regulation 29 of the Bankruptcy Regulations 2021 (Cth).