Mortgages: Equity of Redemption Flashcards
What is the equity of redemption?
It is the bundle of rights which the borrower has.
What are four basic equity of redemption rights?
- Equitable right to redeem supplements legal right to redeem
- No postponement or prevention of redemption.
- No collateral advantages
- No unconscionable terms
Historically, what was the position on the equity of redemption?
Historically, a mortgage arrangement was governed by the law of contract. Every mortgage deed had a date specified on which the borrower had to repay the loan in full, known as the legal date for redemption. If the payment was not made on that date, the borrower forfeited the property to the lender, even if the amount owed was small compared to the overall value.
How did equity soften the law?
Equity intervened to soften this harshness by allowing the borrower to repay the loan at any time after the legal date for redemption had passed. This is known as the equitable right to redeem, and recognises that a mortgage is security for a loan and not an opportunity for the lender to gain something more.
What does it mean to have `equity’ in a home?
Market value less the outstanding debt.
Explain postponement of the right to redeem
It is the lenders interest to keep the borrower `on the hook’ for as long as possible.
*Courts look at clauses which postpone the legal date for redemption closely and will not allow a clause which prevents redemption altogether.
*Equitable rule: there must be no clog or fetter on the equity of redemption.
*Redemption can only be postponed if the borrower gains some benefit from any lock in and gets back exactly what was mortgaged.
Are options to purchase valid?
Options for the lender to purchase the property will be void unless they are genuinely part of an independent transaction.
What is a collateral advantage?
Lenders are entitled only to capital advanced plus interest. If a lender tries to extract additional value from the borrower, the offending term may be struck out as being contrary to the equity of redemption.
When will a collateral advantage be struck out?
A collateral advantage will be struck out if it is unconscionable, in the nature of a penalty, or if it is repugnant to the equitable right to redeem.
What is a solus tie and is it a valid collateral advantage?
In these cases, the lenders are often breweries or oil companies. The lender makes it a condition of the mortgage that the borrower buys all supplies from the lender.
Generally solus ties are upheld if they end within the mortgage term.
When will courts interfere with unconscionable terms?
For courts to interfere, the term must be imposed in a morally reprehensible way, for example, taking advantage of the borrower’s vulnerable position.
What is the position in relation to interest rates being unconscionable terms?
- If a penalty interest rate imposed in the event of borrower default far exceeds the lender’s losses in the circumstances then it will be void.
- A lender will not have acted improperly, and a higher interest can be justified if the borrowers have a poor credit history and are a credit risk. The lender may be justified in charging a higher rate in certain circumstances.
- The lender is entitled to take its own commercial needs into account and may be justified in imposing a higher interest rate where it is in financial difficulties itself providing it is not exercising any discretion for an improper purpose.
If an unconscionable term is declared void, what is the result?
If the term is declared void, it will not be enforceable on the borrower, but the remainder of the agreement will remain in force.
