Buying a home is often the biggest financial decision you’ll make. Few of us have the financial capacity to purchase outright, so securing finance and getting a mortgage forms an essential part of the property journey.
While getting a mortgage to buy property is common, it’s important to understand the legal and financial considerations so you can make an informed decision. This is general information only, and we strongly recommend seeking appropriate legal and financial advice when obtaining a home loan and mortgage.
What is a Mortgage?
A mortgage is a type of loan used to purchase real estate. When you take out a mortgage to buy property, you’re borrowing a substantial sum of money from a lender (usually a bank or financial institution). In return, you will usually need to provide that property as “security” for the loan. You agree to repay the loan over a specified period, with interest, and if you can’t repay the loan as agreed, the lender can take possession of and sell the property to recover their money.
Your Obligations as a Mortgagor
The borrower is known as the mortgagor, and the person lending the money and securing an interest over the property is the mortgagee.
By granting a mortgage, you are liable for regular payments of principal, interest, and other fees as set out in the loan contract. You must also maintain the property, take out adequate insurance cover, and comply with all relevant laws regarding the property, such as the payment of rates.
The lender will register the mortgage on your property’s title to protect its interest. Registration alerts others who may be interested in the property to the existence of the mortgage, which must be dealt with before a new legal interest is created. You will need the consent of your lender before selling the property, granting a further mortgage over the property or for registering certain other interests.
If you fail to comply with the terms and conditions of the loan, the lender can:
- Sue you (or any other borrower) personally.
- Take possession of the property and, after notice, sell it to recover the outstanding amount together with interest and other costs such as legal fees and the costs of maintaining and selling the property.
- If the sale proceeds do not cover the debt due, sue each of the borrowers personally for the balance.
Typically, co-mortgagors are individually and jointly liable for the loan. This means that if one borrower does not pay, the other/s must.
Consumer Protection
Under the National Consumer Credit Protection Act 2009, loan providers must engage in responsible lending conduct. Essentially, this means that they should not suggest or enter into a financial contract that is unsuitable for a consumer. Responsible conduct includes making reasonable enquiries into your financial situation, requirements, and objectives, and verifying information provided. Lenders must also make significant disclosure regarding all applicable fees and charges under the loan contract.
The Australian Financial Complaints Authority (AFCA) is an independent complaint resolution body that can deal with a range of complaints against financial institutions, including those concerning home loans.
Finding a Property and Moving Forward with Your Home Loan
Before you start house hunting seriously, it’s ideal to seek “pre-approval” for a home loan. This is where a lender assesses your financial situation – your income, expenses, debts, and savings – and gives you an indication of how much they are willing to lend you.
While not a final binding offer, pre-approval is a conditional commitment. It puts you in a strong position when making an offer on a property, as it signals to sellers that you are a serious and financially capable buyer. Pre-approvals usually have an expiry date (often 90 days), and if your financial circumstances change, the pre-approval might need to be reassessed.
Loan Documents
After your home loan is unconditionally approved, your lender will provide you with a set of detailed loan documents. These important legal contracts outline the terms of your mortgage.
Key Contents
- Loan amount: The exact sum you are borrowing.
- Interest rate: How much interest you will pay.
- Repayment schedule: When and how much you need to repay.
- Fees and charges: Any ongoing or upfront fees associated with the loan.
- Conditions: Specific terms you must comply with, i.e., maintaining insurance.
- Your obligations: Your responsibilities as the borrower.
- Lender’s rights: What the lender can do if you default on the loan (e.g., take possession of the property).
It’s strongly recommended to have your conveyancer or solicitor review these loan documents with you before you sign them. They can explain their legal implications to help you understand your commitments and make an informed decision.
Engaging Legal Professionals: Your Conveyancer or Solicitor
Once you’ve found a property you’re interested in, you’ll need to engage a qualified conveyancer or property solicitor. Their role is to handle the legal transfer of property ownership from the seller to you, a process known as conveyancing. This includes:
- Reviewing the contract of sale: Your conveyancer or solicitor will review the contract, conditions, and attachments, and explain your obligations and any potential risks.
- Conducting searches: Conveyancers and solicitors carry out various searches on the property and its title, looking for things like undisclosed interests, outstanding debts, or notices against the property.
- Advising on special conditions: If you want to include conditions in your offer (e.g., subject to a building and pest inspection, or subject to finance approval), your conveyancer or solicitor can draft these.
- Preparing for settlement: Your legal team will coordinate with the lender, the seller’s legal representative, and other parties to ensure all conditions are met and funds are ready for transfer on settlement day.
Key Takeaways
- Engage a legal professional early: A conveyancer or solicitor is essential to help you navigate the process of buying property and getting a mortgage.
- Understand every document: Don’t sign anything you don’t fully understand. Ask your legal team to explain any terms or clauses that are unclear.
- Be aware of conditions: Whether it’s a “subject to finance” clause in your offer or specific conditions in your loan agreement, know what you’re committing to.
- Budget for all costs: Beyond the purchase price and mortgage repayments, factor in stamp duty, legal fees, building and pest inspection costs, and potentially lenders mortgage insurance.
If you or someone you know wants more information or needs help or advice, please call (08) 8232 8446 or email [email protected].