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In the light of the current financial forecast, current borrowing and spending habits of New Zealanders, it is anticipated that the prevalence of Mortgagee sales will increase.  A Mortgagee sale is a right vested in the Mortgagee (normally the Lender) by virtue of a charge over property (usually land) created by contract to secure the future payment of money, referred to as a Mortgage.

There is some confusion as to what a Mortgage is.  Often people get confused between a Loan and a Mortgage and refer them collectively together as a Mortgage.  In fact the Loan and the Mortgage are separate contractual matters that are linked together.  The Loan is the lending/borrowing of money and the terms thereof.  The Mortgage is a security for the Loan.  The Loan maybe repaid yet the Mortgage (if registered) may still exist until such is released.  This allows some flexibility in the event that future borrowing is required as a Mortgage not only secure's present borrowing but also future indebtedness.

Most major Lenders will require a Mortgage to be registered against the Certificate of Title to the land.  Registration of the Mortgage creates priority amongst the charge holders.  Therefore if there are two Lenders competing for interest in the land, then priority will go to the Lender that has registered the Mortgage first in time although there is not prohibition on the amount of Mortgages that can be registered.

By granting a Mortgage, the Mortgagor (the person who owns the land or the Borrower) contracts with the Mortgagee to ensure the compliance of the Mortgagor with all obligations under the terms of the Loan Agreement and Mortgage and especially the repayment of debt to the Mortgagee.  The Mortgagor also agrees with the Mortgagee that they will maintain the land in a good condition (as any deterioration will affect the value), pay all rates and levies for the property (rates especially are a charge on the land and rank ahead of any Mortgages), keep the land and improvements insured for full replacement value at all times, not register any further Mortgage without the Mortgagee's consent and to allow the Mortgagee to enter the property at any time for inspection purposes.

If the Mortgagor breaches any terms of the Mortgage or Loan Agreement including the repayment of debt, then the Mortgagee can then proceed to a Mortgagee sale by serving upon the Mortgagor a Property Law Notice specifying the defaults under the Mortgage.  If the defaults are not remedied within the required time specified in the notice, then the Mortgagee may proceed to a Mortgagee sale of the land.  The proceeds of the Mortgagee sale are then used to firstly in payment of the sale costs such as Real Estates agent's commission and subsequently in repayment of debt secured against the property in order of priority.

We do hope that this brief summary is helpful when considering future borrowing.  It always pays to be mindful that once a Mortgage is registered and no further borrowing is likely to occur, then it is advisable to request that your lawyer attend to a discharge of the Mortgage with the Mortgagees consent.

Please remember, this information is designed as a guide only and shouldn't replace the advice of you legal professional.  We welcome your comments: chris.peddie@awslegal.com