How are mortgages regulated under the National Credit Code?

How are mortgages regulated under the National Credit Code?

The National Credit Code (“Code”) regulates mortgages which secure obligations under a credit contract that is regulated by the Code, or a related guarantee, whether or not the mortgage also secures other obligations.

What is a mortgage?

A “mortgage” under the Code is not just a mortgage over real estate. It also includes any security interest in other types of property, such as a security interest over a motor vehicle. It even includes the credit provider’s title to land or goods when these are subject to a sale of goods by instalments. Some mortgages are excluded from the Code.  Excluded mortgages include a mortgage relating to perishable goods, livestock, primary produce or food stuffs, a banker's right to combine accounts, and a lien or charge arising by operation of any Act or law or by custom.

What the Code regulates

The Code sets out the form a mortgage must take, when a copy of the mortgage must be provided to the mortgagor, when a mortgage will be void, the maximum amounts which may be secured under a mortgage, as well as specifying property which cannot be mortgaged.

Basic requirements

For a mortgage to be enforceable under the Code it generally must be in writing, signed by the mortgagor (the person giving the mortgage), and accurately describe or identify the property which is subject to the mortgage.

However, the mortgage can form part of a credit contract that is signed by the mortgagor.  The Code also allows for mortgages over goods that are not in written form, if the credit provider lawfully had possession of the goods that are subject to the mortgage before entering into the mortgage.

The credit provider must provide the mortgagor with a copy of the mortgage within 14 days after it is made (if a copy has not already been given).

The mortgaged property

A mortgage will be void if it does not describe or identify the property to be mortgaged or it charges all property owned by a borrower. A mortgage over future property to be acquired by the mortgagor will also be void unless:

• it applies to property that is to be acquired wholly or partly with the credit provided under the credit contract secured by the mortgage;

• it relates to property or a class of property (whether nor not ascertained) described or identified in the mortgage; or

• it relates to goods acquired in replacement for, or as additions or accessories to, other goods subject to the mortgage.

A mortgage securing a continuing credit contract will be void if it is secured by all goods supplied under the contract.

A regulated mortgage also cannot be created over an employee’s remuneration or employment benefits or benefits under a superannuation scheme.

The Code prohibits a mortgage over essential household property, unless either the mortgagee supplied the goods to the mortgagor as part of a business carried on by the mortgagee of supplying goods and the mortgagor has not, as a previous owner of the goods, sold them to the mortgagee for the purposes of the supply, or the mortgagee is a linked credit provider of the person who supplied the goods to the mortgagor. “Essential household property” is defined in bankruptcy regulations.

Two other types of property can’t be subject to a regulated mortgage:

• property of the mortgagor in earning income by personal exertion (e.g. work tools) if the goods do not have a total value greater than the relevant limit. These limits are indexed each financial year; or

• a cheque, or bill of exchange or promissory note, endorsed or issued by the borrower or a guarantor.

Maximum amount which may be secured

Under the Code, a mortgage is void to the extent that it secures an amount that exceeds the total liabilities of the debtor under the credit contract (or in the case of a guarantor’s mortgage, the limit of the guarantor’s liability under the guarantee) plus the reasonable enforcement expenses of enforcing the mortgage.

These provisions do not affect the operation of all monies mortgages.

In relation to a mortgage, “enforcement expenses” include expenses incurred by the mortgagee in maintaining property subject to the mortgage (including insurance, rates and taxes payable for the property), but only if the expenses are incurred after a breach occurs and are authorised by the mortgage.

“All monies” mortgages

An “all monies” mortgage secures all amounts that the mortgagor owes the mortgagee on any account, whether a current credit account, or a credit account in the future or one dependant on a contingency. All monies mortgages are allowed under the Code but only if the credit provider has:

• given the mortgagor a copy of the contract document of the credit contract or proposed credit contract or a copy of the guarantee or proposed guarantee to which the mortgage relates; and

• subsequently obtained from the mortgagor a written acceptance of the extension of the mortgage to the additional credit contract or guarantee.

Third party mortgages banned

A third party mortgage is a mortgage given by someone other than the borrower or a guarantor. They are banned by the Code.

Assignment or disposal of mortgaged property

A mortgagor must not transfer or dispose of the mortgaged property without the consent of the mortgagee (or by authorisation of a court). The credit provider must not unreasonably withhold its consent or attach unreasonable conditions to its consent.  Conditions which are considered reasonable include:

• replacement security to be provided over property of an equivalent kind and value;

• any breaches of the credit contract and the mortgage are to be remedied;

• the purchaser or assignee must take over liability under the mortgage; and

• payment of the mortgagee’s reasonable costs including stamp duty and legal fees.

A mortgagor can apply to a court for authorisation to dispose of mortgaged property if the credit provider fails to reply within a reasonable time to a request for consent to assignment, or unreasonably withholds consent, or attaches unreasonable conditions to the consent.

Reverse mortgages

There is another kind of mortgage regulated by the Code known as a reverse mortgage. There are special provisions for reverse mortgages which are not covered in this article. See our briefing paper on reverse mortgages for more information.