Home Truths

Issue 65 - Home Truths – A (short) glossary of terms - August 2010

Mortgage: Probably the most abused word connected with real estate. Banks advertise ‘mortgages available’. Banks should know better!

It would, however, probably surprise a large number of people to know that it is the borrower who gives the mortgage to the bank, not the other way around! This is because the mortgage (which means literally ‘until death’) is actually the form of security given by the borrower to the lender (the bank) as security for the home loan.

The ‘Mortgagor’ is therefore the property owner, who has given the mortgage (the security over the property) to the Mortgagee (the lender). Thus mortgagee sales, where the lender, unable to obtain repayment of the loan (or part of the loan) that is due, resorts to taking over possession of the property and (usually) selling it to enable the loan to be repaid (at least in part) from the proceeds.

Freehold:  There are many who confuse ‘freehold’ with ‘unemcumbered’. Sellers tell us that their property is freehold, because they do not have a loan on it. But that mixes up two different things about property ownership.

Let me explain. Freehold refers to the type of title to which the land is subject. For the sake of simplicity, there are two main types of title, as a piece of land can be either ‘freehold’ or ‘leasehold’. Although we do not hear the term much these days, the owner of a freehold was, in days past, known as a ‘freeholder’.

The owner of a freehold piece of land is free to deal with that land as he/she wishes. They can sell it, gift it, raise money using it as security, or they can lease it, this latter giving rise to the term ‘leasehold’, where a person pays for the right to have the use of the land (and buildings on it) for a fixed term.

If the land is not subject to a mortgage (e.g., if any loan has been repaid) then it is said to be ‘unencumbered’; that is, without any encumbrances.

Deposit:  Another cause for confusion, are the two meanings ascribed to the word ‘Deposit’. Both are legitimate meanings so they need to be distinguished from each other.

In connection with an agreement for Sale and Purchase, the word deposit means the amount that a buyer would pay to the Real Estate agent (to be held in their Trust Account), as a show of good faith. It is really a way to communicate to the seller that the buyer is a serious buyer. A good real
estate agent, working on behalf of the client (i.e. the seller), should be trying to secure a deposit of 10% from the buyer.

In connection with a loan, however, the word ‘deposit’ is frequently used as a synonym for ‘equity’, or the proportion of the total purchase price being paid out of the buyer’s pocket rather than by bank loan. Thus, if a bank is willing to lend $320.000 on a home purchased for $400,000, it is commonly said that the buyers need a deposit of $80,000.

Cross-lease:  Contrary to its name, this is not actually a true lease at all but rather it is the name given to a somewhat artificial device dreamed up in the 1970s to enable sub-dividers to effectively split a piece of land into two or more parts, without actually being required to pay all the costs associated with a true subdivision.

Normally, when a subdivision of land is decided upon, there are costs involved, such as water reticulation, stormwater and sanitary sewers to install to each property as well as a contribution to the recreational amenities of the area, the Reserve Contribution. All of these costs can mount up to a very large figure indeed, so a way was sought to avoid these costs. In the event, the answer appeared to be simple – don’t subdivide, but rather consider the land in question as a whole, allocate areas with artificial boundaries, and set up a scheme whereby each ‘owner’ of an area, in effect, ‘leased’ their area from all the other ‘owners’, with all the owners being joint owners but able to deal with their separate parcels of land on an individual basis.

Subsequently, many individual Territorial Authorities (Councils) have changed the rules regarding what can or cannot be done with a cross-lease as opposed to a proper subdivision, to the extent that there is now no financial advantage in creating cross-leases, and the Councils regain control over the Reserve Contributions.