Legal Aspects of Mortgages.
Welcome to the legal section on mortgages giving details about laws that affect mortgages.
This section offers access to all things we believe you should be aware of from the legal side of property purchase and sale or gift.
Please take time to read all the sections to ensure that you are informed and aware of any legal or tax pitfalls.
1. Conveyancing - The Role of Solicitors in Mortgages and Property Purchase
The role of a solicitor is to act as your representative in the purchase of or sale of a property. This is known as conveyancing.
In summary, the solicitor will do the following searches and services.
When you are Selling:
When you are Buying:
2. Freehold and Leasehold
Commonly, there are two ways that people own property (land) in England and Wales. (There are different rules for Scotland).
These are Freehold and Leasehold.
This means that you own the title of the land on which any property stands i.e. you own the land.
This means that you own the property on which the land is built but the land is owned by somebody else - your landlord.
A leasehold agreement allows you to occupy the land with your building but you will pay an annual ground rent.
The leasehold agreement will have an expiry date upon which it finishes. E.g. 99 years. This is the point at which whatever is on the land at the time e.g. your house, becomes the property of the landlord unless you purchase the land.
Can I purchase the freehold title?
Yes, you are allowed to do this. It is advisable to seek legal advice on any purchase.
The owner of land can ask for whatever figure they want to sell the land. However, there have been special legal precedents established which mean that the owner of the land cannot ask for extortionate amounts from you to purchase the land.
The shorter the term of the lease remaining the more expensive the land purchase price is likely to be.
If you need help with purchasing your freehold contact us.
Can I get a mortgage on leasehold property?
Yes you generally can. However, most lenders will not be keen on lending money on properties that have short leases remaining. As a guide, if the property has a remaining lease of less than 65 years you will not be able to get a mortgage on it. It is at this stage that you would have to purchase the freehold to ensure that the sale/purchase will be successful.
3. Joint Tenancy (Joint Tenants) and Tenancy in Common (Tenants in Common) - Vesting Land Ownership
Sole Tenancy or Sole Tenant
This means that you own the whole property solely in your own name.
Joint Tenancy (Joint Tenants)
This means that you jointly own the whole property with another party e.g. your partner. In simple terms, joint tenancy means that you jointly with others own the whole 100% of the property in its entirety. On death, ownership and title passes automatically to the owner that is still alive.
This differs to Tenancy in Common.
Tenancy in Common (Tenants in Common)
This means that you separately own a share of the property. E.g. a husband and wife, if they had not elected for a joint tenancy approach (above) where they jointly own everything, they would own a specific share.
The wife owns a 50% of the property and the husband owns 50% of the property.
Tenancy in common is an approach used where the parties may not be emotionally involved with each other or for Inheritance Tax purposes if a husband and wife have elected to change ownership.
This is common where people wish to pass part ownership of a property to somebody else on death to mitigate Inheritance Tax.
Care should be taken when a property ownership is used in this way as you may need to prove that both parties contributed equally to the purchase of the property, otherwise HM Revenue and Customs, may be able to claim the property as being mainly or wholly owned by one party for tax purposes.
4. Scotland Properties.
Whilst the title and tenure of property names differ in Scotland, the rules are very similar to that for England and Wales.
This is similar to the rules on joint tenancy in England and Wales. Each party jointly owns the whole property.
This is similar to the rules on tenancy in common in England and Wales. Each party owns a specific share of the property.
Scottish Property Tenure - Land In Scotland
Scotland has its own property laws and therefore, its own terms and terminology when dealing with land tenure i.e. how it is owned. Some useful terms are as follows:
There are few leasehold arrangements as in England and Wales and no freehold rights .
Scottish law goes back through the ages and that of feudal rights.
Monarch to Vassal:
In simple terms, 'feudal rights' comes from the right of the Monarch to the land who then passed these rights of the land down to 'vassals'.
Vassal to Lesser:
The people immediately below the Monarch were the noblemen who then may or may not have passed rights to land down to commoners - 'lesser' citizens.
Where a person grants rights over land to another. This is called 'feuing'.
The person who grants the rights or feu is called the 'grantor' or 'superior'.
Quite simply, a vast pyramid has been created where successive vassals, grantors or superiors grant rights over the land to lessers.
Is where a new feudal estate is created. The present owner of rights over the land (vassal or grantee) becomes the grantor of rights (superior) to a brand new grantee (vassel) or feuar. Outright sale Where a new vassal takes the place of another - this now creating another pyramid in the hierarchy.
We would recommend that anyone seeking to purchase land or property in Scotland seek the advice of specialist advisers in Scotland.
4. Death and Property
Depending upon the how the title of the property was established (see joint tenancy and tenancy in common ) the property will either pass to the remaining occupier or pass to the estate for distribution in accordance with the Will.
If no Will has been made it will be dealt with under intestacy laws. Intestacy laws are strict and it is advisable to make a Will if you have not already done so.
If the property transfers to a legally married spouse there is no Inheritance tax to pay.
Assuming life insurance cover has been arranged then these benefits will pay out to enable any mortgage debt outstanding to be repaid and the property becomes fully owned. See the life insurance page.
Rules may be different for overseas property depending upon the country in which you own the property and whether there is a double taxation treaty in place.
5. Property and Inheritance Tax
Property, like any other asset is subject to Inheritance Tax on death.
If the property was purchased under a joint tenancy agreement and the property passes to a surviving spouse on death then there will be no inheritance tax due on death.
If the property was solely owned or jointly under a tenancy in common agreement then the property forms part of the estate for Inheritance tax.
In simple terms, each person has a nil rate threshold where no Inheritance tax is due on death. Any value of assets above the inheritance tax threshold is subject to tax at a rate of 40%.
Advice on beating Inheritance Tax:
There are many ways to mitigate and plan for this tax. Request inheritance tax advice.
Rules may be different for overseas property depending upon the country in which you own the property and whether there is a double taxation treaty in place. Visit the overseas property section for guidance.
6. Home Repossession
Until the day you repay your mortgage in full, the lender (mortgage company) has an interest in the property. In simple terms, you do not technically own the property.
If you fail to maintain the mortgage repayments you do risk having your home repossessed.
Failing to make mortgage payments can be for a number of reasons. This can be because your circumstances have dramatically changed e.g. you have been made redundant or you are unable to work due to illness.
Redundancy protection and Income protection - it is essential that you protect one of your most valuable assets against so that you can maintain payments and avoid repossession.
What if I cannot keep up mortgage repayments?
The advice in these circumstances is simple, talk to your lender immediately. They cannot help unless you talk to them. If you do not keep them informed then they will not know what is happening and will just think you do not wish to pay your bills.
Normally, they will agree a way forward to help you keep your home.
If you do not inform them then you will face the misery of repossession.
This works quite simply. Most lenders will allow for some arrears to build up e.g. three to six months interest payments. They will obviously remind you constantly that you are in arrears. If there is no visible sign that you can afford the mortgage or that you are starting to reduce the debt then they will commence proceedings for repossession.
This will involve formal letters from solicitors, application to courts and then ultimately repossession and eviction.
Incurring Additional Costs
If you are evicted, costs may be awarded against you for all the legal and other costs in removing you from the property. Therefore, you not only lose the property but you may have additional thousands of pounds awarded against.
Any Higher Lending Charge (used to known as Mortgage Indemnity Guarantee premium - MIG) that you may have paid will not protect you. This was a policy that you paid the premium on behalf of the lender - it does not protect you - it protects the lender. If an insurance company pay outs cover for losses to a lender, they may come after you to recover their losses.
In short, if you do find yourself in difficulty - act early.
7. Losing Your Home and Long Term Care
You may not be aware that if you own assets above a certain threshold and you need care in older age e.g. residential care or home help care you will have to pay for those care costs yourself. This is the reality of the Community Care Act.
If you do not have enough regular income or other liquid assets to pay for care, the local authority responsible for providing for care may place a charge over your home. In simple terms, the home that you wished to stay in or pass to your relatives or friends on death may no longer be yours to give as care costs are offset against the value and it will eventually be owned by the authority.
Make yourself familiar with the rules on care fees. How long would your home last if you needed care?
Divorce and the Matrimonial Home
Did you know you may be entitled to a share of your ex-spouse's pension?
Your property in divorce terms is known as the Matrimonial home.
Rights of Occupation:
If you are joint owner, you already have these rights. If not - you may need to register your right to occupy the property - this will detailed in land registry records (or you can check with the lender on any mortgage you may have on the property). This will normally be handled by your legal adviser.
Joint Tenancy - this is where you jointly own the home, there is no specific interest or percentage share - you each own the whole property. This is so that under a jointly owned property (joint tenancy), if one partner died the ownership of the whole property will pass to the surviving spouse. This avoids any dispute by other family members in the event of death.
Tenancy in common - this is where the interest in the property is fixed. Each partner has a specific interest in the property. It is normal for each partner to have a 50% share.
Point to note - Whilst in the negotiation stage of a divorce settlement, some solicitors may advise you to issue a "notice of severance" of a joint tenancy. It can be done in the form of a simple letter - but basically means that if you died whilst within divorce negotiations, your share of the property would not necessarily pass to your ex-partner (as it would under joint tenancy) but become part of your own estate and be dealt with according to your wishes in your Will. If you have not made a Will, we suggest that you visit Wills Adviser.com.
What may happen to the home?
Sale - and divide any proceeds (equity):
It is normal for a property and therefore, any equity, to be jointly owned by both parties. Sometimes, this is not the case and ownership may be on a different share. However, the assets can be distributed according to a financial settlement agreed between both parties using offsetting (e.g. one partner retains a greater share of the property value as the other partner is retaining other interests). If the matter has proceeded to court, then the courts can also issue orders for disposal of the property and distribution of the assets.
There are many factors that may affect the decision of sale or not such as: Whether there are children involved? In whose name the property is in. If there is equity in the home (i.e. the property is worth more than any outstanding mortgage). Who paid the mortgage? Who raised the deposit? etc. We recommend that you always seek professional help when dealing with property matters.
Transfer of ownership:
It can be that an order is made to transfer ownership of the property from joint ownership to sole ownership. This does not normally present a problem if one party offers to buy the other party's share. However, problems can arise if the property still has a mortgage on it. The courts can order the transfer of ownership (the title) of the property but they cannot order the transfer of the mortgage. It is therefore possible for one spouse to own the property but to still have the mortgage in joint names and therefore be jointly liable for any mortgage payments. This is common where one spouse does not work, or does not have enough income to sustain the mortgage.
As part of a divorce settlement, it may be that the former spouse, who no longer will own the home, is required by the lender to offer some form of guarantee to cover the payments should the occupying spouse default (i.e. not pay the mortgage). In this way the mortgage debt may be placed in one name. Alternatively, if the lender is not prepared to accept this then a position may arise where the ownership of the property is in one sole name, the mortgage debt remains in joint names and the occupying ex-spouse agrees to indemnify the other party against any mortgage debt (i.e. the spouse who retains the property agrees to cover the liability of the other spouse). This is quite normal as if any maintenance is maintained then the likelihood of the mortgage falling into arrears is unlikely. Professional help should be sort in this regard to ensure that all parties are aware of their obligations.
It may be that because of the situation, the sale of the property is postponed for a period. It may be that the house has gone down in value, it may be that there are children involved and it is in their best interests to stay in the home, in a settled environment. If this is the case, the courts may order that the sale is postponed until a given date in the future, or when the property value has recovered or children attain a certain age.
Postponed Sales or Transfers and Capital Gains Tax
Your principle place of residence (PPR) is normally exempt from capital gains tax. Likewise, transfers between spouses are free of capital gains tax. However, care should be exercised if deciding to postpone the sale of a property or the negotiations have taken some time or any transfer of ownership is made at a later date. If you have not lived at the property for over three years then it will no longer be classed as your PPR and any sale, disposal or transfer may be subject to capital gains tax. Capital Gains Tax is currently charged at your highest rate of income tax, less an annual gains allowance.
In addition, there is an Extra Statutory Concession D6 that may allow those who need to hold onto a property for longer. This will need to be agreed with your local inspector of taxes.
Please visit the Capital Gains Tax Advice pages for details on capital gains tax and your potential liabilities. You should seek professional assistance if this is a route you may consider.
Request advice from us for help with capital gains tax and your allowances.