Does 'Due on Sale' mean that the whole of the mortgage becomes due to be paid out, if the property is on-sold? - Lesley
Yes. When a home is financed, the borrower agrees to make regular monthly payments. However, if those payments are not made, if they are late, or if the lender's security is reduced (by not making payments, damaging the property, not maintaining insurance, not paying property taxes, selling the property, selling a part of the property by placing someone else on the title, etc.), then the lender has the right to call for the complete and immediate (say within 30 days) repayment of the loan. The mortgage language outlining the lender's rights is generally called a "due-on-sale" or "acceleration" clause.
One effect of a due-on-sale clause is that it effectively prevents a loan from being assumed. In Australia, mortgage loans are not assumable. Apparently, in the UK, mortgage provisions have no Due on Sale clause, same applies to certain types of loans in the U.S. These loans, therefore, are assumable.
In your mortgage documents you won't see a heading that says "Due on Sale". This is a general description of a bunch of statements that you agree to comply with. For example:
I have, or am entitled to, an absolute and unchallengeable title to the interest in the property which I am mortgaging to XYZ Lender; and
as far as I know, nobody else has, or claims, any rights in or affecting the property.
I will not do (or agree to do) any of the following, unless XYZ Lender agrees first in writing:
(a) sell or dispose of the property, or any interest in it;
(b) lease, mortgage, subdivide or consolidate the property; or
(c) grant any other rights of any kind over the property or do or fail to do anything where this might allow another person to hold any such rights.
I will be in default if:
(a) I do not pay any part of the contract debt when it is due to be paid by me; or
(b) I breach any other part of this mortgage.
If the XYZ Lender wasn't informed of your intention to wrap the property when taking out the first mortgage loan and they find out later when you change the Title on the Deed, they will say you defaulted and may call in the loan prior to beginning foreclosure proceedings to take possession of your property.
Apart from the assumable issue the DoS clause is designed to protect the loan security (the property) from being devalued or transfered without their knowledge. The lender must be able to repossess the property as a last resort to sell and repay the loan.
Consequently, any lender in Australia should be informed of your prior intent to wrap a property whether by Lease Option or Instalment Contract. Some lenders will turn you down on that basis because they must comply with mortgage insurers codes or else they don't have the flexibility to allow it. If you put down 20% deposit, you stand a better chance of getting the funding. Some lenders may agree for 10% down and a slightly higher interest rate.
Andrew (Katalyst) appears to be wrapping using Lease Options. He has a downloadable PDF doc which explains his system using Lease Options
http://www.katalystsolutions.com.au
In America, the due-on-sale clause is triggered by any lease longer than three years and is triggered by any lease that contains an option to purchase the property, regardless of the length of the lease. I don't know whether our Consumer Credit Codes specifically mention this but Aust lenders still expect to be informed if you intend using an Option to Purchase since, as Andrew says in his doc, that the Option holder will put a Caveat on the Title anyway. The Lender must agree to this, otherwise you may breach their mortgage provisions.
Regards, Mike