How mortgages work

It is important to remember that all mortgages, irrespective of the way in which the loan is to be repaid, share the same basic characteristics.

This content applies to Scotland

Characteristics of a mortgage 

These characteristics are as follows:

  • The lender has security over the borrower's home and/or any other property which offers the lender sufficient security for the loan.

  • Interest is charged on the loan.

  • The borrower agrees to repay the loan and the interest either by instalments or in a lump sum within a fixed number of months or years.

The standard security

All loans secured on heritable property are subject to the terms of the Conveyancing and Feudal Reform (Scotland) Act 1970. All loans secured since the 1970 Act came into force on 29 November 1970 must be constituted by means of a standard security, a legal document which gives the lender certain rights over the property. [1] The page on mortgage jargon explains more about standard securities.

The standard security contains certain standard conditions, which set out the rights of the lender and borrower, including the borrower's responsibilities to maintain and insure the property, and the lender's rights should the borrower default on the loan (see below). [2]

The lender and borrower can agree to vary the standard conditions, and most lenders will have their own specific conditions. However, the conditions concerning sale and foreclosure cannot be altered. [3]

Where a loan is secured by a standard security, the property can be sold only if there is sufficient money to repay the loan in full or, failing that, if the lender gives written authority for the sale to go ahead and agrees to discharge the security upon repayment of an acceptable proportion of the loan. This is in order to ensure that a valid title to the house can be passed on to a purchaser. [4]

Where there is more than one security over the property (if the borrower has subsequently taken out a secured loan or second mortgage) the money received from the sale of the property will be used to settle the debts in the order in which each security was entered into. [5] This means that the lender (or any individual) registering the initial security will have priority over anyone who subsequently registers one.

If the borrower defaults on the loan

If the borrower defaults on the loan, the lender has the right to exercise the power to sell the property in order to pay off the debt. The standard conditions that include provision for the lender to 'call up' the security and/or serve notice of default.

Taken together, the provisions of the 1970 Act and the standard security provide the lender with the power to force the sale of the property in the event of the borrower's default. The Home Owner and Debtor Protection (Scotland) Act 2010 has brought in new protections for home owners and possession procedures for lenders. [6]

Last updated: 29 December 2014

Footnotes

  • [1]

    s.9(3) Conveyancing and Feudal Reform (Scotland) Act 1970

  • [2]

    The Standard Conditions are set out in sch.3 Conveyancing and Feudal Reform (Scotland) Act 1970

  • [3]

    s.11(3) Conveyancing and Feudal Reform (Scotland) Act 1970, amended by s.1(a) Redemption of Standard Securities (Scotland) Act 1971

  • [4]

    s.41 Conveyancing and Feudal Reform (Scotland) Act 1970

  • [5]

    s.27(1)(c ) and (d) Conveyancing and Feudal Reform (Scotland) Act 1970

  • [6]

    The Home Owner and Debtor Protection (Scotland) Act 2010