Is a mortgagee’s 60% default interest rate just a collateral benefit? Or is it unfair and unreasonable?


Mortgage lenders should not only consider the content of a mortgage term, but also the effect of how it works. Whether the effect of the mortgage terms could be seen to act unfairly or unreasonably on a mortgagor, as stated in the recent decision of the Supreme Court of New South Wales in First Mortgage Capital Pty Ltd v Westpac Banking Corporation Ltd, the court will intervene if this term also gives the mortgagee a collateral advantage that hinders or hinders the fairness of the redemption.

In regards to :

  1. The plaintiff, First Mortgage Capital Pty Ltd (First mortgage), sought to transfer to him two mortgages registered on two NSW properties owned by Westpac Banking Corporation (Westpac), the first respondent.
  2. The properties belonged to the second defendant, Ms. Juri, and the third defendant, Mr. Husain.
  3. Ms Juri and Mr Husain filed a counterclaim, seeking to prevent First Mortgage from redeeming any mortgage on the property they owned, alleging that First Mortgage:
  • the behavior in entering into the relevant loan agreement and the associated mortgages was unreasonable due to the higher interest rates; and
  • the exercise of clause 18.3 (h) of the mortgage memorandum to repay other mortgage creditors was improperly done which amounted to unreasonable conduct and its exercise amounted to a collateral benefit beyond payment of principal, interest and charges.

Fund

In May 2018, First Mortgage advanced $ 289,915.00 to Glocal Villager International Pty Ltd (Glocal). Ms. Juri was the sole administrator.

The loan term was around six months, and Ms. Juri and Mr. Husain granted mortgages on two Victorian properties in exchange for the advance. These mortgages were registered second behind Westpac.

Relevantly, the terms of the mortgage documents:

  • granted First Mortgage a mortgage on all the property of the mortgagors;
  • defined by “debtor” to mean the borrower and / or the mortgagor;
  • specified a lower interest rate of 30% per annum and a higher default rate of 60% per annum; and
  • gave First Mortgage the right to repay another mortgagor in the event of default by the mortgagor, this amount being part of the “secured money” owed.

Ms Juri and Mr Husain signed a declaration stating that they understood the guarantee and mortgage provided in favor of First Mortgage, having also received legal advice explaining the nature and effects of the guarantee and the mortgage.

The loan was not repaid on the due date and in 2019 First Mortgage initiated enforcement proceedings.

As a result, First Mortgage exercised its rights to pay the first mortgages on other properties owned by Ms. Juri and Mr. Husain. The first mortgage, held by CBA on two other Victorian properties, was paid in January 2020. Then in May 2020, First Mortgage paid off a mortgage held by Westpac on a property in New South Wales. First Mortgage later sold these three properties, recovering approximately $ 850,000.

However, prior to the sale of the properties, a total of $ 487,297.96 was added to “secured money,” almost 1.7 times the original loan amount, attracting 60% interest.

In May 2020, First Mortgage began to transfer the two first mortgages held by Westpac on the two Victorian properties owned by Ms. Juri and Mr. Husain on which First Mortgage held second mortgages.

The Court’s conclusions

Were the Interest Rates Unreasonable?

The Court concluded that it was not unreasonable for First Mortgage to enter into the loan and mortgage with the interest rate provisions. Although high, the rates weren’t outrageous for short-term commercial loans. Ms. Juri and Mr. Husain entered into the transaction knowing the interest rates, without undue influence, pressure, exploitation or victimization and after receiving legal advice.

Collateral advantage which was an obstacle to redemption?

The mortgages paid were subject to much lower interest rates and until the secured properties were sold mortgagors were subject to an additional interest charge, even though the secured debt had not increased. First Mortgage essentially assumed the position of the first mortgage creditor, while charging interest at a higher default rate under a different loan agreement that was secured by a lower ranking mortgage. It was a guarantee of the interest of First Mortgage to recover the principal, plus the interest.

Was Clause 18.3 (h) Unfair and Unreasonable?

In the opinion of the Court, clause 18.3 (h) of the mortgage could be viewed as a collateral benefit and an obstacle or obstacle to the exercise by Ms. Juri and Mr. Husain of redemption equity. However, even if it were so, it would be upheld unless it was found to be unfair and unreasonable.

The Court concluded that clause 18.3 (h) worked unfairly for mortgagors because large amounts of debt, initially subject to standard interest rates by banks lending on the first mortgage, were effectively converted into interest loans raised. The injustice lay in imposing the higher default rate of 60% on the amount paid, not in paying off the mortgages and adding that amount to the guaranteed money. While the mortgagors were in default on the mortgages originally granted in favor of the first mortgage, they were treated as being in default by a much larger sum. In addition, the collateral available on total indebtedness had not diminished.

In the Court’s view, First Mortgage’s use of clause 18.3 (h) to charge 60% interest on amounts paid either to redeem or to acquire first mortgages was below community standards, could be described as morally deficient and involved an operating element of mortgagors’ default.

Exercising clause 18.3 (h) in this manner allowed First Mortgage to obtain an unreasonable collateral advantage which impeded the mortgagors’ ability to discharge and was not enforceable.

The court’s decision

In the end, First Mortgage was prevented from applying clause 18.3 (h) and limited to charging the interest rates provided for by the ABC and Westpac mortgages on the amounts it had paid, or in the absence of such rates of justice.

Key to take away

In the event that a mortgage clause has the effect of providing the mortgagee with a collateral advantage and an obstacle or obstacle to the equity of the redemption, a court will not intervene, unless the clause is found to be unjust and unreasonable.


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