A mortgage is created when an owner of property (usually real estate) pledges or 'mortgages' the property to a lender such as a bank or financial institution as security for a loan. The property owner is the 'mortgagor' and the lender the 'mortgagee'.
The mortgage document, which will usually be prepared by the lender's lawyers, will include a range of conditions under which the loan is made. Breach of any of these conditions will probably allow the lender to call in or 'foreclose' on the loan. It is essential that, if you are a borrower and enter a mortgage agreement, you read and understand the terms to which you are agreeing and the options the lender has if you fail to comply with those terms.
The lender should explain the terms and give you time to obtain legal advice on them if you are unsure of their full implication. It is very important that you obtain legal advice before signing a mortgage over your property as a great deal may hinge on the terms and conditions contained in it.
In a High Court case well known in banking circles, a bank officer pressed an elderly couple to sign a mortgage over their family home as security for a loan to their son's building company. The documents were not explained to them. The bank eventually attempted to foreclose and sell the home, but legal action by the couple was successful in having the mortgage declared void because of the bank's failure to give the couple time to get independent legal advice, in circumstances where it ought to have been evident to the bank that the couple were under a special disability.
Source:
CBA v. Amadio (1983) 151 CLR 447.
The Consumer Credit Code (see above) covers mortgage as well as other credit contract, but only where they are for purposes covered by the Code. For example, it does not cover mortgages for business purposes (see Consumer protection, above).
The Trade Practices Act (TPA) is also relevant. If the banking case study above occurred today, the bank would be in breach of the TPA. The TPA gives as examples of unconscionable conduct 'whether the consumer was able to understand any documents relating to the supply or possible supply of the goods or services' and 'whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer' (s. 51AB). Failure to allow the mortgagee time to consider the mortgage document and failure to explain its contents would certainly amount to unconscionable conduct.
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