What is a mortgage?
Often used to mean a home loan, the word mortgage actually means something quite different. When you borrow to buy a home, the lender will want some way of getting their money back if you can no longer repay the loan. To achieve this, you usually agree to let them sell your home if they have to. That legal agreement is called a mortgage. So you give the lender a mortgage over your home.
A lender will only sell your home as a last resort. They usually explore all other options first, such as a temporary mortgage repayment holiday or extending the term of your loan to reduce the regular repayments.
What is a secured loan?
When it comes to buying a home or borrowing money, the word ‘security’ is used a lot. It basically refers to how the lender ensures (secures) your loan’s full repayment, no matter what. A secured loan is one that has a security in place. A home loan is nearly always secured through a mortgage over the property. The property is the security.
The security for car finance is usually the car itself. That’s why it’s important to make sure there’s no finance owing on a car before you buy secondhand. Otherwise the lender could legally repossess your car to recover what is owed by the previous owner.
Unsecured loans are usually only for relatively small amounts and they come with much higher interest rates to reflect the lender’s additional risk.
What is a mortgage discharge?
The existence of a mortgage over a home is recorded on the property’s official title document. When you eventually sell the property and repay the loan from the proceeds of the sale, your lawyer can apply to the lender for a release from the mortgage agreement. This is called a ‘mortgage discharge’. The property title can then be amended by your lawyer as well.
If you’re buying another property using a home loan, a new mortgage agreement will have to be signed with the lender. This happens even when you transfer an existing home loan from your previous property to the new one.
If you’re not selling, but simply refinancing with another lender, the original mortgage will have to be discharged and a new one set up with the new lender.
Most lenders charge a fee to set up and discharge a mortgage; lawyers also charge for their part, including updating the property title.
What does mortgage free really mean?
When you eventually repay your home loan in full, you finally own your home (and you’re probably off to the nearest fancy restaurant to celebrate). Technically, however, you’re not mortgage free until the lender has provided a mortgage discharge. You can ask your lawyer to apply for a discharge and update (clear) the property title.
Some people may not be able to do this if they’ve provided a mortgage over the property as security for other loans, such as business finance. Others may leave the mortgage in place in case they want to borrow again in the future, using the home as security. It means they won’t have to pay extra mortgage establishment and discharge fees to their lender and lawyer.
What is a mortgagee sale?
When someone can no longer make their home loan repayments and a property is sold by the lender to recover what they’re owed, it is known as a ‘mortgagee sale’. The lender (mortgagee) recovers what’s owed and the remaining proceeds from the sale (less real estate agent fees) go to the owner – the mortgagor.
In a mortgagee sale, the seller is the lender (usually a bank) not the home owner. However, the home owner may be trying to sell the property at the same time. If so, the owner’s sale process would not be a mortgagee sale, as they are not the mortgagee.
If you’re thinking of buying a property through a mortgagee sale, it’s important to realise the terms and conditions are usually very different to a normal sale. Here are a few common examples that may apply:
- You can’t view the property before buying, other than from the roadside
- It is sold in ‘as is’ condition
- It’s not offered for sale with vacant possession, so there’s no guarantee the owner will have moved out and removed all their belongings when the house becomes yours
- The mortgagee may not have the property insured after signing the sale and purchase agreement
- The mortgagee doesn’t have to provide information about unapproved construction, council building consents and code of compliance, or even boundary information
- The buyer may also have to pay any outstanding rates and body corporate fees
The sale and purchase agreement will usually provide full details of the sale conditions in each case.
To ensure the sale still attracts buyers, despite the higher risk conditions above, the eventual sale price is often lower than it would be under a normal sale.
However, it’s very important to consult a lawyer before bidding at an auction or signing anything related to buying at a mortgagee sale.
So what’s a home loan then?
As the name suggests, it’s a loan to buy a home. But it can also refer to a loan for a section, the construction of a new house or renovations to an existing one.
There are many types of home loans or home loan products, as lenders often call them. Each has its own features and benefits, including whether it’s available with fixed and/or variable (floating) interest rates. The total amount a lender agrees to lend you can be borrowed through one type of loan on one type of interest or you can split the amount across two or more loans.