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know your rights and obligations of the mortgagor (borrower)
This article is focused on New Zealand law and explains issues from a Common law perspective.
How to raise a mortgage in New Zealand
You have decided that you wish to make a New Zealand property purchase or embark on an activity for which you have insufficient cash; consequently, the only way you can proceed is by obtaining credit. In order to do this you will need to satisfy a lending institution's lending criteria. This is likely to involve careful consideration of your assets and liabilities, your income and expenditure, and also your credit history.
Accordingly, before you approach a lending institution it is important to consider the amount of surplus income you have each fortnight that could be applied toward loan repayments. You should also consider unforeseen events, such as what would happen if you lost your job, if you were to die, or if interest rates were to escalate dramatically.
There are various sources of funds, often offering similar terms. You should approach your own bank first and then compare its loan offer with other banks or finance institutions. Alternatively, you may consult a mortgage broker.
Obtaining a home mortgage
When a lending institution agrees to lend you funds it will often require rights over your assets. If you have a house then the lender will wish to take a mortgage over the house. A mortgage gives the lender security for the funds lent to you; therefore if you fail to honour your commitments the lender will be able to exercise its rights over your house either by taking possession of it and earning income from it, or by selling it. These rights are in addition to the right to sue you for your breach of the loan contract.
People commonly refer to the loan they have obtained to buy a house as their "mortgage". However, the mortgage and the loan, although related, are in fact different: the mortgage is the lender's security for the loan.
Registration of the mortgage
The lending institution will instruct your solicitor to act on the lender's behalf to register a mortgage over your property in favour of the lender. This will involve your solicitor obtaining the title deed to your property and then lodging this deed in the local office of the Land Titles Service, together with a mortgage document that the solicitor has had typed up with all the relevant details and that has been executed and signed by you.
The lender's rights under the mortgage
With the registration of the mortgage, the lender gains a legal interest in your property. You are obliged to consider the lender's interest when you are dealing with your property.
Under the mortgage you have an obligation to honour your commitments under the loan agreement (which you will have signed in front of a lending officer or your solicitor), to pay your rates and insurance, and also to maintain the value of your property by ensuring that if you are carrying out any developments of it that you obtain the relevant building consents or resource consents.
For more information, see How to know your rights and obligations as mortgagee (lender). See also How to obtain a building consent.
The lender holds the title deed until the mortgage is discharged
The lending institution holds the title deed to your property with the mortgage until the loan is repaid and you have requested that the mortgage be discharged.
Note that the lender will not attend to the discharge of the mortgage automatically when the loan has been repaid; rather, you will need to request the lender to do this.
Other rights and obligations under the mortgage
In addition to the rights to collect income from the property or to sell the property if you default on the loan agreement, a mortgage may give a number of other rights to the lender or impose a number of obligations on you. You should give careful consideration to the terms and conditions of both the mortgage and the loan agreement so that you are fully aware of your responsibilities.
Refinancing your mortgage
Where you are raising a loan to repay an existing loan it is important that you calculate carefully the costs involved in completing the refinancing. These can be high, particularly if the existing loan is on a fixed interest rate, and therefore savings on repayments do not always justify the expense of refinancing. The costs may include bank administration fees, valuation fees, registration fees and solicitor's costs.
- When you obtain a loan it may be worthwhile arranging insurance cover for risks such as your death. If insurance cover is in place for the amount of the mortgage it will mean that the mortgage will be repaid on your death, and accordingly there will be no risk that your property might have to be sold, leaving your dependants needing to find alternative accommodation.
- A prospective borrower should be particularly careful in calculating the costs involved and the amount of the loan repayments. If need be, you should seek professional help.
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