This week’s article was prompted by a request during a recent conversation about houses, their values and the terminology used by people to describe their current situation. It was suggested that an article could be written to help highlight how certain phrases are often misused or misunderstood, and got me thinking about some of the wording common on sale and purchase contracts and loan documents that may not be clear to all those who actually have a need for them.
The first phrase, pointed out by the person I was talking to, is Freehold. Where many people think that “freehold” relates to a house that no longer has any borrowing against it, the phrase actually refers to the title of a property and the fact that there is no time limit on ownership of the land (Unlike “Leasehold” property which has a definite number of years before a lease arrangement has to be renegotiated). Freehold in effect means that the owner, or their estate, will continue to own the property until such time that it is sold to another party.
Where the confusion has generally come from is in the fact that any loan that may have originally been taken out to purchase the property has been repaid, so no debt is held against the property. This is referred to as a property being unencumbered. However, another common error is for somebody who has an unencumbered property telling their friends or adviser that they no longer have a mortgage on their home. What they need to relate is that they no longer have a home loan, although on some occasions even this may not actually be the fact. If the person has managed to clear their borrowing due to the clever use of a line of credit loan, they may still have a limit in place much like the limit on a credit card. Unless they advise the bank to cancel the facility it will remain in place and may even incur additional charges even though the actual debt has been repaid. It is therefore a good idea to let your bank or adviser know if you wish to clear the facility once you have paid back the loan. Although on some occasions it may be beneficial to retain the facility in order to borrow funds at housing interest rates rather than taking out a higher rate personal loan for the purchase of household goods, vehicles or holiday expenses.
So what is the mortgage? A mortgage is a legal document that pledges a property to the lender as security for repayment of a debt. The word itself comes from English lawyers in the middle ages and is translated from its French origin as “Death pledge”. In other words, it is a promise that expires (dies) once the debt is fulfilled by repayment or forced sale of the property. Your home is merely the security or collateral that is used as a guarantee for your payment of a debt.
The final related phrase, which is frequently a cause for confusion amongst home buyers when they’re signing loan documents at the bank, is Priority Amount. The priority amount is a figure set down on the mortgage. Usually set at around one and a half times the value of the home loan, it allows the mortgagor (bank) to determine a figure that can be paid back from the proceeds of any sale of the property. It is set at a higher figure to allow the borrower to access additional funds without having to pay legal expenses for a variation of mortgage, even if the house value has increased in the years since the home loan was first taken out.
As can be seen from the terminology used, there can often be crossovers in the use of wording on your mortgage and loan documents and it is a good idea to work with an adviser who can simplify things for you, to take out the confusion and stress and leave you to just concentrate on repaying the loan.
