Definition
A mortgage is an interest in property created as a security for a loan or payment of a debt and is terminated once the loan or debt is paid off. The borrower, who offers the property as security, is referred to as the mortgagor, while the lender, who provides the money, is the mortgagee. Financial institutions like building societies and banks are typical mortgagees for house purchasers, although other providers also exist.
A mortgage is normally repaid by monthly installments over a period of 25 years. These repayments may consist of both capital and interest in a repayment mortgage or only interest, with separate arrangements to repay the capital, as in an endowment mortgage. Business uses of a mortgage include securing a loan to start a new venture using property as collateral.
Virtually any property can be mortgaged, although land is most commonly used. Additional mortgages, or second/subsequent mortgages, can be taken out on the same property if its value exceeds that of previous mortgages.
Equity of Redemption
Under the equity of redemption, mortgagors are allowed to redeem the property at any time by paying the loan together with interest and costs, which may include early redemption penalties. Although mortgagees theoretically have the right to take possession of mortgaged property without default, this right is generally excluded by building-society mortgages until default occurs. For residential properties, courts may delay the recovery of possession if default is likely to be remedied within a reasonable time.
Mortgagee Rights and Foreclosure
In the event of default, the mortgagee has the statutory right to sell the property, usually after obtaining possession. Any surplus remaining after settling the debt and the mortgagee’s expenses must be paid back to the mortgagor. Additionally, the mortgagee has the statutory right to appoint a receiver to manage mortgaged property during default, particularly useful for business properties. As a last resort, a mortgage can end through foreclosure, wherein the court orders the property’s transfer to the mortgagee. However, this is rare during rising property prices as the mortgagor stands to lose more than the debt’s value.
Examples
- Typical Residential Mortgage: John takes out a 25-year mortgage to purchase a home, making monthly repayments of principal and interest to his bank.
- Endowment Mortgage: Jane has an endowment mortgage where she pays interest to her mortgagee and has a life insurance policy intended to pay off the principal sum at the end of the mortgage term.
- Business Mortgage: A company mortgages its office building to secure a loan for expansion, with monthly repayments structured as interest-only until the loan matures.
Frequently Asked Questions (FAQs)
1. Can I have more than one mortgage on a property?
Yes, you can take out a second or subsequent mortgage on a property provided its value exceeds the amount of previous mortgages.
2. What happens if I default on my mortgage payments?
If you default, the mortgagee has the statutory right to sell the property, but this will usually be exercised after obtaining possession. Surpluses after settling the debt and costs must be returned to the mortgagor.
3. Can I pay off my mortgage early?
Yes, but you may incur an early redemption penalty, which should be stipulated in the mortgage agreement.
4. What is foreclosure?
Foreclosure is a court-ordered transfer of the property to the mortgagee, ending the mortgage. This typically happens when other options are exhausted and is less common during times of rising property prices.
5. What is a receiver in terms of a mortgage?
A receiver is appointed by the mortgagee to manage mortgaged property in the event of default. This is often useful for managing business properties.
Related Terms
Mortgagor
The borrower in a mortgage agreement who offers the property as security.
Mortgagee
The lender in a mortgage agreement who provides the funds to the mortgagor.
Endowment Mortgage
A type of mortgage where the borrower pays interest only and makes separate arrangements, like an endowment assurance policy, to repay the principal sum at the end of the term.
Repayment Mortgage
A mortgage where the borrower repays both the interest and the principal amount over the term, typically 25 years.
Equity of Redemption
The right of the mortgagor to redeem the property by paying off the debt, interest, and costs at any time before foreclosure.
Foreclosure
A legal process in which the mortgaged property is ordered by the court to be transferred to the mortgagee, typically when all other recovery methods fail.
Online Resources
Suggested Books
- “The Complete Guide to Different Types of Mortgage Loans” by Michael Boyles
- “Real Estate Mortgages: The Ultimate Guide to Mortgage & Financial Freedom” by Liam S. Baker
- “The Mortgage Professional’s Handbook Volume I: Insider Look at Navigating the Challenges and Opportunities Vol. 1” by Jesse B. Sargent
Accounting Basics: Mortgage Fundamentals Quiz
Thank you for diving deep into mortgage fundamentals with us. Now, you’re well-equipped to understand the intricacies of this crucial financial instrument and ace any related questions that come your way!
