Mortgages On Leasehold Properties

If the security be leasehold certain additional rules apply, such as -

(1) The relation of the ground-rent (paid to the freeholder) to the rack-rent (or the full rent at which the premises can be let to a solvent tenant upon a repairing lease): if the rack-rent be £40 the ground-rent should generally not exceed £5 or £6 a year. This relation naturally varies with the situation of the property: thus in the centre of the city of London the rack-rent will often be double only of the ground-rent. I am referring above to advances made upon houses in the suburbs of London.

(2) As a rule, for premises of the nature I am describing, the unexpired term of the lease should not be less than sixty or seventy years.

(3) The character here of the holder from the ground landlord is the more important seeing that the lease may be voided by an infraction of the conditions.

(4) The solicitor employed should also report upon the covenants of the lease, and whether they are of the customary character or unusually stringent.

(5) The margin will not be less generally than one-third of the selling value, that is to say, if the property be valued at £300 the advance should be restricted to £200.

(6) Assuming the security to be a sound one in all respects, the loan may still be properly made (notwithstanding the fact that the value is annually diminishing by mere effluxion of time), for a period of five or seven years, for the reason I have assigned, but upon the appended condition: the valuer, besides expressing the market value for sale at the present time, should furnish also (approximately) the probable (reduced) value - due to the lapse of the term of the lease - at the date when the period for which the loan has been granted will expire; the lender should then stipulate in the Deed of Mortgage that this difference of value should be annually paid in equal parts, as instalments in redemption of the advance. Thus (merely for illustration) if the present selling price be £800 and its selling value at the end of the five years, say, be £700, the process will be as follows: with a margin of one-third the advance of, say, £530 will be effected; in order to preserve this margin approximately throughout the currency of the transaction the amount of the loan at the close of the five years should not exceed one-third of £700, or, say, £460; hence the difference of £70 should be repaid in the form of reductions of the advance by instalments of £14 a year.

In all mortgages, whether upon freeholds or leaseholds, the solidity of structure of the buildings should form a part of the Valuer's Report.

Only first mortgages should bo considered.

In all advances the lender should accept only first mortgages;1 and further, the mortgage should be a legal one. An equitable mortgage is a deposit of the title-deeds, accompanied by an undertaking to execute thereafter a legal mortgage whenever required by the lender. But why adopt this imperfect course? When the lender demands a legal mortgage the borrower may be insane and unable to execute, or he may have meantime harboured adverse feelings towards the lender, and refuse to complete the deed except upon onerous conditions; and litigation is imminent.

1 When the security consists of a second mortgage, the lender is entirely fettered in his action in every direction, since the first mortgagee possesses all controlling rights and remedies over the property.

Inadvisability Of Lending Money To Discharge Borrower's Debts

In any mortgage it is never, or very rarely, desirable to lend money which is simply required to discharge debts by the borrower. Investigation should be made, and the result may be that the loan may still proceed, or extravagant and reckless habits may be revealed which render the proposed mortgagor an imprudent and unsatisfactory person to contract with. Wherever possible it is well to restrict these transactions to persons who desire to purchase the house in question, or to utilise the money in the development of any business in which they may be engaged - a sign accordingly of the kind of borrower to be encouraged.

Unwisdom of an advance on manufacturing premises or flats and mansions.

It is exceedingly unwise to make advances upon the security of manufacturing premises. Many of them, of course, may admirably suit this purpose, but the investor must consider the following contingencies in any instance which may be submitted to him: the possibility of an alteration in the demand for the articles manufactured, either from a change of fashion, or from competition at home and abroad, or from future deficient management; the two former causes may require large additional expenditure to cope with the altered condition, and the money may not be forthcoming; the practical impossibility in many instances, if the particular trade should fail or prove inadequately productive, of adapting the premises and machinery to other industrial purposes which may be more prominently in favour - so that in some cases there may exist the prospect of the mortgagee being left as his security with useless buildings and virtually bare land. The difficulty, naturally, is augmented if the property be held on leasehold tenure, through the necessary discharge of the ground-rent with no income, or insufficient income, to provide it. With these possible vicissitudes, which are difficult of measurement, the investor will prudently avoid these securities, however flourishing and stable be their condition. A similar remark applies to flats and mansions, on the ground of the vast competitive extent to which they have been erected, and the possibility of a change in residential fashion creating a serious general fall of value. The purchase of properties (houses, shops and ground-rents) may be briefly considered.