Dealing with Previous Owners' Loan After Property Purchase

When purchasing a property, one common issue that arises is the presence of a loan under the previous owner's name. This situation can create complications, particularly if the loan is still active at the time of purchase. Here, we discuss the importance of settling such loans and the steps involved in the process.

Understanding the Issue

It is crucial to ensure that the title of the property is clear before it is registered in your name. A Non-Encumbrance Certificate (EC) should be obtained prior to purchasing the property. If the EC indicates that the property is encumbered, this means that it is subject to a mortgage or other form of lien. In such cases, the existing mortgage must be resolved before the property can be legally transferred to your name.

Clearing the Equitable Mortgage

In the context of an equitable mortgage, the rights of the equitable mortgagee (usually the bank) and the mortgagor (the previous owner) are crucial. The mortgage should be cleared based on a release letter from the bank. This release should be registered with the Registrar of Assurances to ensure that the property is free from any encumbrance.

Failing to clear the existing mortgage can pose significant issues, as the title deed of the property cannot be deemed as freehold unless the encumbrance is removed. Failing to clear the mortgage might also affect your ability to sell or refinance the property in the future.

Steps to Resolve the Issue

Here are the steps to follow if you encounter this issue:

Review the Non-Encumbrance Certificate (EC): Ensure that the EC does not show any encumbrances. Contact the Former Owner: If waiting for a release letter, you may need to follow up with the former owner, as they are responsible for obtaining the release from the bank. Seek a Release Letter: Once the former owner has obtained the release letter, it should be taken to the Registrar of Assurances for registration. Update the Property Registry: After the loan has been cleared, the property registry must be updated to reflect the change of ownership under your name.

Validation of the Release Process

To ensure the process has been completed correctly, verify that the transactions in the Non-Encumbrance Certificate (EC) are accurate as follows:

The transaction should begin with the name of the first owner. Then the bank's charge should be noted. Lastly, the release of the charge by the financier should be documented. The record should be updated with your name only from the date of sale or registration.

Conclusion

Properly addressing any encumbrances, such as loans under the previous owner's name, is crucial before finalizing the purchase of a property. This ensures that the title deed is free and clear, allowing for smoother transactions and avoiding future complications. Consulting with real estate agents, lawyers, and financial advisors can help navigate these complexities and ensure a smooth property purchase.