An introduction to mortgages and loan contracts

Date: Dec 11, 2013
Document Type: Newsletter

The majority of Australian home owners will more likely than not, be subject to a mortgage. For the most part, there are two broad types of mortgages in use:

  • security that involves the actual conveyance of a legal estate to the mortgagee; or
  • a mortgage where the lender acquires an enforceable charge against the property.

By understanding what a mortgage contract entails, may assist you if you’re considering purchasing a property, or by having a greater understanding of what the ‘right of equity of redemption’ means – and how it may apply to you. 

Equity of redemption

There exists with the mortgagor (the person borrowing the money) an equitable right to redeem (also referred to as equity of redemption) and will occur upon the securing of a loan contract amounting to a mortgage. When an equitable right of redemption does arise, it gives way to a proprietary interest, rather than a personal contractual right which can be alienated, and be dealt with in the same way when reference is made to other equitable property interests.

When can the equitable right of redemption be enforced?

Once the mortgagee accepts payment, the equitable right of redemption is enforceable – even in instances where payment is made after the due date. Additionally, the equitable right of redemption can also be enforced by a Torrens title mortgagor even though they retain legal title, as Finkelstein J stated in Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (in liq)(No 3) (2008) 246 ALR:

“In my view a mortgagor of Torrens land has a legal right to obtain a discharge of mortgage on payment of the amount secured by the mortgage (or, subject to any rights of foreclosure, a lesser sum if the proceeds are insufficient to cover the debt) and equity applies the appropriate remedy, usually in the form of a mandatory injunction or specific performance.”

What must be included in a loan contract?

For an equitable right of redemption to be enforced, all of the terms of the loan contract must have been complied with, and compliance may mean the following:

  • the mortgagor tenders payment on the contractual date for repayment, therefore, they will be will exercising their contractual and legal right to redeem;
  • the mortgagor has money payable on demand,  which means they can repay the amount at any time a valid demand has been made;
  • upon the passing of the contract date for repayment, the right to redeem the secured property can only be enforceable in the equitable jurisdiction.

Can relief be sought before or after the contract date?

Before the passing of the contract date, the relief that can be sought will be specific performance in aid of the contractual right. On the other hand, upon the passing of the contract date, if the mortgagee accepts payment, than the mortgagor will be entitled to enforce their equitable proprietary right of redemption.

Can an equitable right be extinguished? 

There are various situations where the right to redeem in equity can be extinguished, and can be generally done so under the following circumstances:

  • the mortgagee chooses to foreclose a property;
  • the mortgagor has not enforced their right within the statutory limitation period;
  • the mortgagee has purchased the right of redemption.

However, equitable jurisdictions may be reluctant to interfere with the enforceability of the right of redemption. One such example that may be considered as interference in the enforceability of the right of redemption, will be a situation where either a right, or option to buy a mortgaged property, extinguishes the right to redeem. Such a right can only be done so via a separate and independent agreement.

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