(6) Mortgage

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Monograph : Conveyancing

Contents

(6) Mortgage

Nature of mortgages

A mortgage involves the granting of a loan by a bank or a financial institution to a borrower on the security of the borrower's immovable property, to secure repayment of the loan to the bank.

Types of mortgages

Legal mortgage

A legal mortgage is a mortgage of a legal estate.

S.44 (1) of the Conveyancing and Property Ordinance provides in effect that a mortgage of a legal estate may be effected at law only by way of a charge by deed expressed to be a legal charge. There are two important elements:

i.	The interest mortgaged has to be a legal estate; and

ii.	The mortgage is effected by a charge by deed expressed to be a legal charge.

Equitable charge

Equitable mortgages can arise in two situations:

i.	The interest mortgaged is equitable, for example, the property is held under Conditions of Sale and a government lease is not yet issued or deemed to have been issued under S.14 of the Conveyancing and Property Ordinance or interest acquired by a purchaser under an agreement for sale and purchase of property; or

ii.	The formality for creation of a legal mortgage is not complied with, for example, a mortgage not effected by deed.

Further charge

A further charge usually refers to a subsequent mortgage to a mortgagee of a property which is already subject to a prior mortgage in favour of the same mortgagee, as security for a further loan to the same borrower as in the prior mortgage not otherwise secured by the prior mortgage with the same mortgagee.

Second mortgage

A second mortgage may arise when:

i.	A subsequent mortgage to a mortgagee of a property, which is already subject to a prior mortgage in favour of the same mortgagee, is created as security for a loan to a different borrower from that in the prior mortgage; or

ii.	A subsequent mortgage of a property, which is already subject to a prior mortgage ("the first mortgage") in favour of a mortgagee ("the first mortgagee") is created in favour of another mortgagee ("the second mortgagee") as security for a loan granted by the second mortgagee.

The risk of the second mortgagee in the case of paragraph d (ii) is high in three respects:

	the first mortgage has priority over the second mortgage;

	the second mortgagee does not have the original title deeds of the property (which are usually kept by the first mortgagee); and

	the second mortgagee has no control over the disposition of the property by the first mortgagee in the event of the first mortgagee exercising his powers under the first mortgage.

Principal clauses in a mortgage

The principal clauses in a mortgage are as follows:

a.	Mortgagor's covenants – these include covenants by the mortgagor that he is the legal owner, he will pay the principal and interest, he will maintain and repair the property, etc.

b.	Events of default – these include the breach by the mortgagor of any of the terms of the mortgage, the mortgagor becoming bankrupt (if individual) or in liquidation (if a limited company), etc. The mortgagee can exercise its powers under the mortgage upon occurrence of any event of default.

c.	Powers of mortgagee – these include power to sell, let, manage and insure the property, etc.

d.	"All monies" mortgage or "fixed sum" mortgage – An "all monies" mortgage is one where there is no limit on the amount of the indebtedness secured by the mortgage and the property mortgaged is security for all indebtedness outstanding and payable by the mortgagor under the mortgage. A "fixed sum" mortgage is one where the amount of the loan secured by the mortgage is fixed and stated in the mortgage and the mortgaged property is only security for the loan outstanding up to the stated amount.

e.	Provision for redemption – the mortgagee will, upon full payment of all amounts outstanding under and secured by the mortgage and compliance of the mortgage terms by the mortgagor, execute a redemption document releasing the property from the mortgage.

f.	Interest rate – the exact mortgage interest rate is usually stated in a facility letter or similar document rather than in the mortgage.

g.	Appointment of mortgagee as attorney – the mortgagee is usually appointed by the mortgagor as the mortgagor's attorney, to carry out any obligations on the part of the mortgagor under the mortgage.

h.	No waivers – any delay or failure on the part of the mortgagee in exercising any of his powers under the mortgage will not constitute a waiver on the part of the mortgagee to exercise such power.

i.	Fees, costs and expenses – all fees, costs and expenses relating to the administration and processing of the mortgage and the redemption thereof will be payable by the mortgagor.

Sale by mortgagee

If a mortgagee exercises the power of sale in the event of default, the sale proceeds obtained have to be applied pursuant to the priorities stated in S.54 of the Conveyancing and Property Ordinance as follows:

(1st)	in discharge of all rent, taxes, rates and other outgoings due and affecting the property;

(2nd)	in discharge of any prior incumbrance;

(3rd)	in payment of the receiver's lawful remuneration, costs, charges and expenses and all lawful costs and expenses properly incurred in the sale or other dealings; and

(4th)	in payment of the amount due and owing under the subject mortgage. Any residue will be paid to the mortgagor (unless there is a subsequent mortgage or encumbrance).

If the sale proceeds after deduction of the items (1st) to (3rd) above is insufficient to repay the amount owing to the mortgagee, the mortgagee may claim against the mortgagor for the deficit.

Procedures for application and granting of mortgage

Applying for and granting a mortgage usually involves the following steps:

a.	The mortgagor will supply information about the property (for example, address, area, age and purchase price) to the mortgagee to enable the latter to evaluate the market value of the property and to confirm the amount of the loan, mortgage interest rate, repayment term and other terms of the mortgage;

b.	If necessary, the mortgagee will appoint a valuer to physically inspect the property for valuation purposes;

c.	The mortgagee will scrutinise the mortgagor's proof of income (for example, tax return, salary payment records, bank balance, etc.);

d.	The mortgagee will issue a letter of offer to the mortgagor, stating the amount of the loan, the mortgage interest rate, the amount of monthly mortgage payment, the number of instalments, the charges on early redemption and other terms, and requiring the mortgagor to sign and accept the said terms within a specified period; and

e.	The mortgagee will issue a letter of instruction to his solicitors to approve the title of the property on behalf of the mortgagee and to prepare the relevant mortgage deed and documents.

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