The Mortgage Contract

The Mortgage Contract

What is a mortgage contract?
 
A mortgage is a contract of loan, secured on property. Like any other contract, its meaning and effect depends largely upon its express terms. 

The contractual terms upon which the lender contracts with the borrower are usually comprised in a combination of:
  • The application for loan/mortgage 
  • The offer of loan/mortgage
  • Loan agreement (if there is one, with loan conditions)
  • The mortgage deed (which usually incorporates the terms of the offer of mortgage and/or mortgage conditions) 
  • The mortgage conditions
  • Any ancillary documents such as forms of guarantee (where applicable in the case of third party security); certificates of independent legal advice; consents or deeds of postponement by other adult occupiers; mortgages or assignments of life policies; notices to lessors; notices to buildings insurer; tariffs of charges etc.

What's in the mortgage?

There is no such thing as a standard form mortgage or charge. They vary considerably in form and content. In its simplest form, a legal charge of registered land in Form CH1 charges the estate by way of legal mortgage as security for the payment of a specified sum. In practice, most institutional lenders use their own bespoke forms of mortgages and conditions                        .

A mortgage deed will usually contain the following main provisions, which may be supplemented by the mortgage conditions.
1. An acknowledgement of receipt of the advance (although this is not conclusive as to the amount advanced).
2. A covenant for payment, usually to repay the principal sum with interest on a fixed date.  This is the redemption date and it is probably of little assistance these days to distinguish between a legal date for redemption (which, historically was usually six months from the date of the mortgage) and the equitable right to redeem at a later date. If no fixed date for repayment is specified in the mortgage, the debt is repayable on demand, and the mortgage may contain further provisions to deal with this. Covenants for payment of principal and interest are recoverable as distinct debts with different limitation periods in s 20 Limitation Act 1980. 
3. The charge itself - although this may take different forms it will typically stipulate that the borrower with full or limited title guarantee charges the property to the lender by way of legal mortgage as security for the payment or discharge of the moneys and other obligations and liabilities of the borrower.
4. Covenants by the mortgagor: These will typically include covenants for repair; insurance; payment of outgoings; compliance with statutes etc; payment of rent and performance of covenants (in respect of leasehold property); restrictions on leasing; the use and occupation of the mortgaged property; dealing with notices etc;  payment of costs, charges and expenses; plus miscellaneous other matters.
5. Lender's powers: This will typically contain a range of contractual powers and provisions which may be in addition to, or a variation of, the statutory powers in Part III of the Law of Property Act 1925, including such things as the appointment of receivers. It will usually begin by identifying the events of default or other triggering events upon which the mortgage monies are to become due and the rights, including the power of sale, are to become exercisable.  Strictly, it should also stipulate whether and upon what terms the right to possession may be postponed.
6. Other provisions: These may include such things as a further assurance; a power of attorney; a lender's certificate being conclusive as to the amount due; provisions for assignment or transfer of the security; notices; and governing law. 

What is the mortgage product?

This expression is used to describe the particular type of mortgage, and will usually stipulate:
  • The mortgage term, e.g. 25 years
  • Whether the mortgage is repayment (principal and interest) or interest-only
  • The interest rate package, e.g. whether there is a fixed rate or initial discounted rate (and on what basis) and how the interest rate reverts after any initial discounted term comes to an end
So, for e.g. a mortgage product might be described as a 25-yr, repayment mortgage at an initial fixed rate of 2% per annum for five years and thereafter reverting to the lender's standard variable rate. 

It is often difficult to identify the particular mortgage product from the mortgage deed alone, and it may be necessary to look at the offer of loan. 

How much interest can be charged?

Technically, there is nothing to stop a lender charging what it wants, although the rates will usually reflect industry typical rates for loans of that kind, reflecting the borrower's credit-worthiness and the risk of default to the lender.  However, excessive rates might be challengeable as a penalty or unfair term or as giving rise to an unfair relationship, and may be subject to the court's statutory power to moderate the rate of interest when it makes a time order.

The rate may be fixed or variable, or may include a mechanism for ascertaining the rate to be applied from time to time. In some, particularly shorter-term, lending, interest for a period may be debited from the advance (in other words charged up front) or capitalised and added to the principal sum due for repayment at the end of the term (and which may or may not attract additional interest - this is the difference between retained interest and rolled-up interest.

Even if interest is not stipulated, it may still be recovered from the date on which repayment becomes due and at such rate as the court may allow. 

Although mortgages can, and often do, stipulate for changes in interest rates from time to time, the power to vary interest rates is subject to an implied term that it will not be exercised dishonestly, for an improper purpose, capriciously, arbitrarily or in a way which no reasonable lender, acting reasonably, would do  (Paragon Finance Plc v Nash [2001] EWCA Civ 1466).

It is increasingly common for mortgages to stipulate for a higher rate of interest on default. There is an historical rule that if a lender wishes to stipulate for a higher rate on default of punctual payment, it must reserve the higher rate as the standard rate and provide for a reduced rate in the event of punctual payment (and not the other way around). In practice though, it may be doubted whether this rule still applies. 
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