Many homebuyers are currently grappling with a pressing issue: on one hand, developers have halted construction due to broken capital chains, leaving the properties undeliverable; on the other, buyers are still obligated to make monthly mortgage payments to banks. Consequently, some buyers have opted to cease their mortgage repayments.
Is this decision legally tenable? What are the risks associated with mortgage default?
Firstly, it's crucial to understand that purchasing a house through a mortgage involves a tripartite relationship. Due to insufficient funds, buyers pledge their property as collateral to secure a loan from the bank, which then pays the developer. This establishes a purchase contract between the buyer and the developer, and a loan agreement between the buyer and the bank.
When a developer fails to deliver a property on time due to its own reasons, it bears the responsibility. In such cases, courts will first address the dispute between the buyer and the developer. If the court determines that the delay is attributable to the developer, it will rule to terminate the purchase contract.
Subsequently, the court will review the case between the buyer and the bank. According to precedents set by the Supreme Court, if the failure to deliver the property on time is due to the developer, leading to the termination of the "Pre-sale Contract for Commodity Housing," the "Loan Contract" and "Mortgage Contract" between the buyer and the bank become void as the contractual purpose cannot be achieved. The developer must then refund the principal and interest of the housing loan to both the bank and the buyer, absolving the buyer from further mortgage obligations.
However, if the buyer unilaterally defaults on the mortgage without following the legal process to terminate the loan contract with the bank, the bank will initiate legal proceedings. Upon confirming the buyer's unilateral breach of contract, the buyer will not only be responsible for repaying the principal and interest but will also incur penalties, breach fees, legal fees, and potentially be labeled as a defaulter.
Once an individual defaults on a mortgage, they will be blacklisted in the People's Bank of China's credit reporting system. Until the outstanding debt is fully settled, the individual will be unable to apply for loans or credit cards. Even after full repayment, the adverse credit record will remain for five years, affecting future loan amounts and interest rate discounts.
We understand that minimizing losses is the most pressing need for homebuyers today, but it should be pursued through legal channels: Buyers can file a lawsuit requesting the court to terminate the commodity housing purchase contract and the commodity housing mortgage loan contract. Do you see the way forward now?
Regarding the down payment, which is paid by the buyer to the developer, upon cancellation of the purchase contract, the developer must refund the full amount to the buyer. If the developer is insolvent and unable to pay back, it will enter bankruptcy proceedings. As a creditor, the buyer can claim a portion of the assets sold during liquidation or restructuring.
Relevant Regulations:
Article 20 of the "Explanations of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Cases Involving Disputes Over Contracts for the Sale of Commodity Houses": If the contract for the sale of a commodity house is declared invalid, revoked, or terminated, resulting in the inability to achieve the purpose of the commodity house guarantee loan contract, a party's request to terminate the commodity house guarantee loan contract shall be supported.
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