Mortgage Law

Types of mortgage

Under the Law of Property Act (1925), which governs mortgage regulations in the UK, there are two types of mortgage, legal and equitable.

A legal mortgage confers a legal estate on the mortgagee (lender). Under the 1925 Act, the only valid mortgages are:

(a) a lease granted for a stated number of years, which terminates on repayment of the loan at or before the end of that period; and

(b) a deed expressed to be a charge by way of legal mortgage. All other mortgages are equitable mortgages, in which the mortgagee obtains an equitable interest in the property only. Such a mortgage may arise in two ways:

(1) If the mortgagor (borrower) has only an equitable, as opposed to a legal, interest in the property (for example, because he or she is a beneficiary under a trust of the property) he or she can only grant an equitable mortgage. Provided that the mortgage is created by deed, the rights of the parties are very similar to those under a legal mortgage.

(2) An equitable mortgage can also be created of a legal or equitable interest by an informal written agreement, e. g. the mortgagor hands the title deeds to the mortgagee as security for a loan. The great majority of mortgages are now of this kind. Such a mortgagee has the remedies of repossession and foreclosure only (see below).

Second mortgages

A second or subsequent mortgage may be taken out on the same property, provided that the value of the property is greater than the amount of the previous mortgage(s). All mortgages of registered land are noted in the register of charges on application by the mortgagee, and a charge certificate is issued. When mortgaged land is unregistered, a first legal mortgagee keeps the title deeds. A subsequent legal mortgagee and any equitable mortgagee who does not have the title deeds should protect their interests by registration.

Redemption

Under the so-called equity of redemption, the mortgagor is allowed to redeem the property at any time on payment of the loan together with interest and costs, which may include a penalty for early redemption; any provisions in a mortgage deed to prevent redemption (known as clogs) are void.

Repossession and foreclosure

In theory, the mortgagee always has the right to take possession of mortgaged property even if there has been no default. However, this right is usually excluded by building-society mortgages until default, and its exclusion may be implied in any instalment mortgage. Where residential property is concerned, the court has power to delay the recovery of possession if there is a realistic possibility that the default will be remedied in a reasonable time. In case of default, the mortgagee has a statutory right to sell the property, but this will normally be exercised after obtaining possession first. Any surplus left after the debt and the mortgagee's expenses have been met must be paid to the mortgagor. The mortgagee also has a statutory right to appoint a receiver to manage mortgaged property in the event of default; this power is useful where business property is concerned. As a final resort, a mortgage may be brought to an end by foreclosure, in which the court orders the transfer of the property to the mortgagee. This is not common in times of rising property prices, as the mortgagor would lose more than the value of the debt, so the court will not order foreclosure where a sale would be more appropriate.