When lending money to a third party it is common practice for a lender to secure their loan against assets of the borrower. A common example of this is securing money against a property by means of a mortgage. But what exactly is a mortgage, and how can a lender best protect their loan?

A mortgage is a legal interest granted to a lender that secures a loan by creating a legal interest in a freehold or leasehold property – in turn this is protected by a charge registered on the title to the property. In essence the financial outlay of the loan is linked to a specific property to provide the lender with security that they will have an asset to rely on should they need to require re-payment of the loan. It offers protection to the lender on the borrower’s insolvency.

Mortgages can either be equitable or legal in nature, and the type of mortgage will result in different levels of security for the lender. A legal mortgage (protected by a legal charge) is the most secure form of security as it grants the lender an express interest in the land and prevents the borrower from dealing with the secured asset while it is subject to the legal charge.

To ensure that a legal charge is correctly secured, the interests of a lender should be clearly set out in the property registers administered by the Land Registry. If these formalities are not adhered to then the charge will be an equitable charge as it will not have been perfected by registration. Frequently charges are registered together with a restriction on the title to the property, which has the effect of limiting the ability of the borrower to register certain dealings with the property (such as leases, sales, or creating further charges) without the consent of the lender. Should a borrower want to dispose of or deal with their property while the mortgage is ongoing then they will need to contact the lender and seek their consent to the proposed transaction. If there is to be a further charge the lenders will likely require that a deed of priority is entered into to govern the priorities and interests of each lender.

For loans to companies the charge should also be registered at Companies House. Not only does this provide security against a liquidator, administrator or creditor, but it also provides evidence to third parties of the existence of the charge, and can be used as evidence as to the priority of the loan against other debts of the company.