For the purposes of this subtopic, it is assumed that the mortgage is of Torrens system land, and is unregulated by the National Credit Code (“the Code”), which is contained in Sch 1 of the National Consumer Credit Protection Act 2009 (Cth). Personal property mortgages and mortgages regulated under the Code (Consumer mortgages) are dealt with under separate subtopics.

In the great majority of cases, it is the mortgagee (or its solicitors) who draft the entirety of the mortgage documentation, and, typically, there are few if any amendments made to this draft prior to execution. Thus, in practice, there is very considerable scope for a mortgagee to include covenants in the mortgage (and in the loan agreement, if the terms of the loan are not included in the mortgage itself) for the mortgagee’s own benefit. Although, in theory, a mortgagor may draft the proposed loan and mortgage documents, in practice most mortgagees will decline to contract on the basis of such documents, and the mortgagor is likely to be limited to proposing minor changes to the mortgagee’s standard form documentation.

Covenants affecting the enforcement of mortgages may be included in the mortgage itself and/or in a separate agreement (such as a loan agreement).

Mortgage or loan documents typically contain a covenant (called an “acceleration clause”) enabling the mortgagee to elect to bring forward the repayment of the principal if there is default. If the acceleration clause is in the mortgage itself, then it usually cannot be given effect to until a statutory default notice has been served and has not been complied with. An acceleration clause in a separate loan agreement can be effective without the need to serve a default notice.

In New South Wales only, a mortgagor has a statutory right to repay a loan early and receive a discharge, but at the cost of paying all the interest for the remaining term of the loan (note that there is no statutory right to repay a loan early in other jurisdictions). Mortgage covenants, however, typically allow a mortgagor to effect early repayment with little or no penalty. See Repayment of the principal.

Mortgage or loan documents often provide for a dual interest rate mechanism, with a lower rate when the loan is not in default and the interest is paid on time, but otherwise a higher rate. So as not to be liable to be set aside as a penalty, covenants imposing a dual-rate mechanism need to be drafted so that the higher rate is imposed as the standard rate applicable to the loan and the lower rate as a concessional rate granted in certain circumstances. If the lower rate is set as standard and the higher rate as a penalty on default, then usually the covenant imposing the higher rate will be void as a penalty.

A mortgage should contain a covenant adding unpaid interest to the balance of the loan and making it clear that interest is calculated on the combined total of that outstanding amount.

Although the size of the interest rate is a matter of importance in determining whether a loan is unconscionable, a high interest rate negotiated by commercially-aware people is not sufficient on its own to make a loan unconscionable or otherwise unenforceable.

Unless the contractual documents otherwise provide, the agreed interest rate only applies up to the date of judgment, when the loan is said to “merge” into the judgment and only the prescribed court interest rate then applies. If the interest rates under a loan transaction are likely to be higher than the prescribed court interest rates, then the mortgagee should include a covenant stating that the agreed interest rate runs not only on the loan but also upon any judgment into which the loan is merged.

Charging premiums in a mortgage over and above amounts of interest and costs (such as requiring an additional month’s interest to be paid on default) will normally result in the covenants in question being declared void as penalties. See Interest rates.

A mortgagee should be careful not to include covenants that complicate enforcement by requiring additional notices to be sent which are not normally required by law. A mortgage can also be drafted so that no default notice needs to be served when the default did not involve the failure to pay money.

A mortgagee may wish to have covenants dealing with cross-collateralisation (securing other loans over the security property) or charging clauses charging the present loan over other properties. Such covenants reduce the risk to the mortgagee by increasing the amount of security provided for any given loan.

In order to facilitate enforcement of a mortgage following default by the mortgagor, a mortgagee will normally want covenants permitting the mortgagee to appoint a receiver, allowing the mortgagee to act as the mortgagor’s attorney, and contractually fixing an easy method of service.

An express covenant allowing the mortgagee to take possession and sell the security property on default is desirable as if the mortgage is not registered, then that enables the mortgagee to seek specific performance of that covenant in subsequent enforcement proceedings. See Default.

First mortgagees normally retain the certificate of title to the security property, and typically require a covenant from the mortgagor that the property will not be further mortgaged without its consent.

A mortgagee should ensure that a covenant exists permitting it to receive its costs of mortgage enforcement on an indemnity basis. There should also be a contractual regime whereby on discharge, the mortgagor either provides a deed of release to signify that there are no outstanding issues to be litigated between the mortgagee and mortgagor, or if there are such issues, that the mortgagor instead provides a sum of money as fulsome security for the mortgagee’s anticipated costs of such litigation.

A mortgagee will normally desire covenants which give it the ability to decide whether payments be applied to the principal or to interest, and which prevent the mortgagor from claiming a set-off (being a situation when Party A can validly refuse to make a payment to Party B because of a debt Party B owes to Party A) against the mortgagee.

There will also often be a clause obliging the mortgagor to maintain the mortgaged property in good repair, and granting the mortgagee a right of entry to inspect the state of the property.

See Other clauses.