“Mortgage” is defined in the National Credit Code (s 204(1)).
Not all mortgages are lawful. Several types of mortgages are banned/void: those that do not describe/identify the mortgaged property; all-property mortgages; mortgages that are greater than the debtor’s liabilities under the credit contract; future-property mortgages; continuing credit mortgages, third-party mortgages; and mortgages over essential household property, employees’ salaries and tools used to earn an income.
What is a mortgage?
The definition of a mortgage in the National Credit Code (NCC) is wide (s 204(1) NCC). In practice, a borrower under a mortgage agreement will nominate property that may be taken and sold by the lender if the borrower does not repay the money loaned.
Typically, credit providers require a mortgage over residential property as a condition of providing a home loan, or a mortgage over a car for a car loan. However, not all mortgages are lawful. As well as banning certain types of mortgages, the NCC can provide relief from “unjust” mortgages (defined in s 76 NCC). (See “Unjust contracts”.)
A mortgage is void to the extent that it secures an amount exceeding the sum of the debtor’s liabilities under the credit contract and any reasonable enforcement expenses associated with the mortgage (s 49(1) NCC). Similarly, a mortgage is void to the extent that it seeks to secure an amount in excess of the guarantor’s liability under the guarantee and any reasonable enforcement expenses of the mortgage (s 49(2)) (see “Guarantees”).
A mortgage that does not describe or identify the property that is subject to the mortgage is void (s 44(1) NCC). A provision in the mortgage that charges all the property of the mortgagor (i.e. an all-property mortgage) is also void (s 44(2)).
A provision in a mortgage that allows the credit provider to create a mortgage over property that will or may be acquired by the mortgagor after the mortgage is entered into is void (s 45(1) NCC). However, this does not apply to provisions in a mortgage where:
• the property to be acquired will be obtained wholly or partly with the credit provided under the credit contract secured by the mortgage (s 45(2)(a));
• the mortgage relates to property that is described or identified in the mortgage (s 45(2)(b)); or
• the mortgage relates to goods that will be obtained as a replacement for, or as additions or accessories to, other goods that are subject to the mortgage (s 45(2)(c)).
A mortgage cannot have the effect of securing goods supplied from time to time under a continuing credit contract, unless those goods are specifically identified (s 46 NCC).
Mortgages that cover all debt owed by a debtor to the credit provider are allowed under the NCC, provided certain requirements are met (s 47 NCC).
Credit providers are prohibited from entering into a mortgage to secure obligations under a credit contract where the mortgagor is not a debtor under the contract or a guarantor under a related guarantee (“a third-party mortgage”) (s 48(1)–(2) NCC).
A third-party mortgage is unenforceable (s 48(3)). A party to the mortgage may apply to a court for an order that the credit provider discharge the mortgage (s 48(4)).
For contracts entered into after 1 July 2010, section 50 of the NCC prohibits mortgages over essential household property – as defined in section 116(2)(b)(i) of the Bankruptcy Act 1966 (Cth) and regulation 6.03 of the Bankruptcy Regulations 1996 (Cth). (For a list of protected items, see “Warrant to seize property” in Are you in debt?)
The exceptions to this rule are:
• where the mortgagee supplied the goods to the mortgagor as part of the mortgagee’s supply business (s 50(2)(a)); and
• where the mortgagee is a linked credit provider of the person who supplied the goods to the mortgagor (s 50(2)(b)).
Section 50 also prohibits mortgages over:
• employees’ remuneration (s 50(1)); and
• tools used to earn an income if they do not have a total value greater than the relevant limit worked out under regulation 6.03B(2) Bankruptcy Regulations 1996 (Cth) ($3750 from 26 April 2017) (s 50(5) NCC; item 3(4) sch 1 National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (Cth) (“Transitional Act”)).