What is a mortgage?
The definition of a A restriction attached to ownership of property to secure the repayment of money borrowed. The mortgage stops the owner of the property selling it until they have paid off the debt. in the National A debt that does not have to be paid until some future time. Being allowed to pay later, in the future, for something you are getting now. Code (NCC) is wide (s 204(1) NCC). In practice, a borrower under a mortgage agreement A document that sets out what a person wants to happen to their money and other property after they die. nominate 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’, below.)
A mortgage is Having no legal effect. A void agreement has something wrong with it, so it cannot be a legally binding contract. For example, a verbal agreement to buy land would be void, because the law says those contracts have to be in writing. to the extent that it secures an amount exceeding the sum of the debtor’s liabilities under the A contract relating to the giving of credit. 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 The amount a person does not get back from the insurer when they make a claim on their insurance. For example, if a car is insured for an agreed value of $10 000 with an excess of $1000, the insurer will pay only $9000 on a claim if the car is written off. of the guarantor’s Legal responsibility, enforced by civil or criminal courts. under the A binding promise made as reassurance that another person will carry out their legal obligations (e.g. paying a debt). The person making the promise is called a guarantor. If the person being guaranteed fails to pay, the guarantor becomes responsible for the debt. and any reasonable enforcement expenses of the mortgage (s 49(2)) (see ‘Guarantees’, below).
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 the mortgage that charges all the property of the A person who borrows money and signs a mortgage as security. The money is often lent to buy something valuable, such as real estate, and the mortgage is a debt over that property. (i.e. an all-property mortgage) is also void (s 44(2)).
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 An agreement that the law will enforce. secured by the mortgage (s 45(2)(a));
- the mortgage relates to property that is described or identified in the mortgage (s 45(2)(b)); 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)).
Continuing credit mortgages
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 NCC).
Mortgages that cover all Money that is owed by one person or business to another. owed by a A person who owes a debt. 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 is unenforceable (s 48(3)). A A person or organisation directly involved in a court case. Parties include the plaintiff or applicant, the defendant, and any third party added to the action, but not independent witnesses. to the mortgage may apply to a An independent body that hears legal claims brought by parties and decides between them. Serious cases are heard by a judge and jury, or just a judge. Less-serious cases are heard by a magistrate. for an order that the credit provider (1) To fulfil an obligation or be released from an obligation. For example, a debtor can discharge a debt by paying it; a prisoner can be discharged (released) from jail. the mortgage (s 48(4)).
Mortgages over household goods and tools of trade
For contracts entered into after 1 July 2010, section 50 of the NCC prohibits mortgages over essential household property – as defined in section 116(2)(b)(i) of the When a debtor who cannot pay their debts has their money and property taken over and managed by a trustee who uses it to pay back creditors. The debtor is then called a bankrupt. A written law made by parliament. Also called an ‘Act of parliament’, ‘statute’ or legislation. 1966 (Cth) and regulation 6.03 of the Bankruptcy Regulations 1996 (Cth). (For a list of protected items, see ‘A document issued by a court directing an officer to take certain action. May be a warrant of apprehension, directing that a person be arrested and brought before a court; a warrant of commitment, directing that a person be arrested and imprisoned; a warrant of distress, directing that a person’s goods be seized to satisfy a debt; or a warrant of seizure and sale of real estate. to seize property’ in Chapter 5.2: Are you in debt?)
The exceptions to this rule are:
- where the A person or body, such as a bank, that lends money secured by a mortgage over the property of the borrower. supplied the goods to the mortgagor as part of the mortgagee’s supply business (s 50(2)(a)); and
- where the mortgagee is a A credit provider who has an agreement with someone selling goods, for example a car. If a customer wants to buy goods but needs to borrow the money, the seller will suggest the buyer go to that credit provider. of the person who supplied the goods to the mortgagor (s 50(2)(b)).
Section 50 also prohibits mortgages over:
- employees’ remuneration (s 50(1)); and
- tools used to earn an income if they do not have a total value greater than the relevant limit worked out under regulation 6.03B(2) Bankruptcy Regulations 1996 (Cth) ($3800 from 20 March 2020) (s 50(5) NCC).