When advancing monies, Lenders are obliged to take security from Borrowers or their sureties so as to protect their interests in the event of default by the Borrower. One of the most common ways of doing this is for the Borrower to execute a mortgage or charge over Real Property in favour of the Lender.
Before executing a mortgage/charge in favour of a Lender, consideration should always be given to the following matters:
1. What is the amount of the loan?
2. What is the term of years for repayment?
3. What is the frequency of the repayments required by the Lender – monthly, quarterly, annually?
4. What is the rate of interest payable on the loan and more particularly, the annual percentage rate or A.P.R.? The A.P.R. calculates the total amount of interest that will be paid over the entire period of the loan and its purpose is to help compare the true cost of borrowing.
5. Is the Interest Rate Variable or Fixed?
(i) If Variable, the rate can increase or decrease and thus the amount of the repayments can go up as well as down.
(ii) If Fixed, then the amount of the repayments remains the same for a set period of time after which the rate will revert to the Lenders Variable Interest Rate unless the Borrower avails of another Interest Rate then on offer by the Lender
It is very important to note that the interest rate specified in the Loan Offer or Facility Letter may vary on or before the date of actual draw-down of Borrower loan. It is also very important to note that if the Borrower decides to pay off the whole or part of the loan during the Fixed Rate period, then he/she will have to pay a penalty sum. This Penalty Clause is to deter people from paying off their Mortgage within the Fixed Rate period.
6. If the Borrower defaults on his repayments, the Lender may sell the mortgaged property and discharge all sums due to it out of the proceeds of sale. If the proceeds of sale are not sufficient to discharge the secured liabilities to the Lender, then the Borrower must also pay the amount outstanding.
7. The Borrower must keep the premises fully insured and expend all monies received on foot of such insurance on the reinstatement of the premises.
8. The Borrower may be obliged to take out and maintain Mortgage Protection Insurance to provide against his/her death during the term of the mortgage.
9. The Lender will retain the title documents of the property until the loan has been paid off or until the Borrower indicates his intention to sell/re-mortgage and pay off the amount outstanding.
10. The Borrower will be obliged to keep the property in good repair and condition.
11. Usually, a Bank Mortgage will cover all present and future liabilities. Accordingly, if a Borrower has a Car Loan, Overdraft Facilities, Credit Cards or a liability under a Guarantee with the same Lender from whom he/she is obtaining the mortgage the Lender can refuse to release the Borrower from his/her liabilities under the Mortgage until such time as all monies due to the Lender have been paid.
12. The Loan Offer / Facility Letter may be subject to Special Conditions such as provision of confirmation from the Borrower’s Accountant with regard to tax affairs, execution of Guarantee by specified person. As all of these matters must be complied with before the loan can be drawn down, the Borrower should ascertain as soon as possible whether or not he/she is in a position to do so and contact the necessary third parties in this regard.