Know your rights and obligations as mortgagee (lender) within NZ

Introduction

A person's home is usually his or her largest asset and will usually be financed in part by a mortgage. The New Zealand law recognises both the substantial amount of money involved and the owner's likely emotional attachment to the property, and seeks to strike a balance between the rights and interests of the mortgagee (the lender) and the mortgagor (the borrower).

While the rights of mortgagees are extensive in order to ensure that their interest is protected, at the same time the law requires that they comply with strict limitations and procedures in dealing with the mortgagor's property. The rights and obligations of mortgagees are found in the NZ PROPERTY LAW ACT 2007.

The rights of mortgagees

The statutory rights of the mortgagee (lender) include:

• the right to transfer his or her interest to a third party
• the right to sue the mortgagor personally if the mortgagor is in default under the mortgagor's "personal covenant" to pay the debt (rather than the mortgagor enforcing the security under the mortgage by taking possession of or selling the property)
• the right to enter into possession of the property or to exercise the power of sale if the mortgagor defaults in making the necessary payments under the mortgage
• the right to sub-mortgage

There are also special rights where the mortgage is over a lease or a unit title.

Are there limits on the Interest rate that can be charged?

A mortgagee is entitled to charge interest on any money advanced. There is no legal limit on the rate of interest that may be charged; the interest is normally a matter to be agreed on between the mortgagor and mortgagee.

Under the Credit Contracts and Consumer Finance Act 2003 a mortgagee must not act oppressively, and if he or she does so, this is a ground for the court re-opening the mortgage contract. However, if the parties are dealing with each other on equal terms and there is no abuse of the mortgagee-mortgagor relationship, a high interest rate (and an even higher penalty interest rate) does not in itself amount to oppressive conduct. (See How to get out of a loan contract, credit sale (hire purchase agreement) or other consumer credit contract).

The procedure where the mortgagor defaults in payments

When a mortgagor fails to honour his or her obligations (for example, failing to make a payment due under the mortgage), you as mortgagee cannot exercise the remedies of taking possession of or selling the property unless you first serve the mortgagor with the appropriate notice under the PROPERTY LAW ACT 2007.

This notice must set out:

• the nature and extent of the default complained of
• the date by which the default must be remedied (if it is capable of being remedied)
• the rights you as mortgagee are entitled to exercise if the mortgagor does not remedy the default within the specified period

The mortgagor's right to redeem

As a mortgagee you are not entitled to prevent the mortgagor's right to redeem. This means that the mortgagor is entitled to repay money owing under the mortgage before the due date specified in the contract.

A mortgagor who pays off a mortgage before the due date must pay the mortgagee all amounts owing under the mortgage and, in addition, interest on the principal sum for the remaining period of the mortgage according to the contract.

Mortgagees entitled to no more than full repayment

A mortgagee may not attempt to gain some additional advantage from the mortgagor other than full repayment of the loan principal and interest, and costs and expenses. Therefore if the mortgage transaction includes some other agreement giving the mortgagee a further advantage - for example, that the mortgagor will buy certain goods only from the mortgagee – that other agreement will be void.

How do I protect my interest if there are other mortgagees?

It is not uncommon for a mortgagor to take more than one loan out on the same property. If you are a mortgagee in that situation it is advisable that you register a memorandum of priority, which will secure your interest ahead of the other mortgage or mortgages if the mortgagor becomes insolvent.

Varying the terms of the mortgage

The LAND TRANSFER ACT 2017 allows for the terms of a mortgage to be altered, including:

• increasing or decreasing the amount or rate of interest
• shortening, extending or renewing the term of the mortgage
• altering any of the powers contained or implied in the mortgage

The variation of the terms of the mortgage must be agreed to in writing by both the mortgagor and the mortgagee.

Cautionary notes

• The information given above is only a brief outline of an area of law that is comprehensive and at times complex. If you intend to lend money through a mortgage it is advisable that you consult a lawyer familiar with this area.
• In exercising your rights as a mortgagee the courts strictly enforces the relevant procedures and time limits that must be followed. You should therefore familiarise yourself with all the relevant requirements.
• Different provisions exist if you as mortgagee are in possession of the property in question.