A mortgage, as well as the mortgage, is a so-called “land charge” (a real property right that allows the protection buyer to immediately realize the right to property or property) that is entered in the land register. Both mortgages and mortgages are ways to secure real estate financing from the bank.
The mortgage serves as a hedge of the debt of the property owner when he takes out a mortgage loan. In order to secure this mortgage loan, the Bank has secured the security of the mortgage entered in the land register, which allows it to foreclose the property in the event of the borrower’s insolvency and to repatriate the loan with the proceeds of the sale.
Mortgage loans are a financing option for owners of land, houses or condominiums, which are usually granted as a so-called annuity loan, with fixed rate fixation over five to fifteen years and constant installments.
The mortgage loan offers high security and low interest rates
Mortgage lending involves very little risk to the lending bank, as the lending amount is a maximum of sixty percent of the estimated real estate value. Thus, it is almost always guaranteed that even in the case of insolvency of the customer from the proceeds of the compulsory auction or receivership, the bank can repay the entire outstanding loan amount. As the security for the bank is high, the borrower has very low lending rates that are well below the interest rates of regular loans without a lien.
For mortgage loans, as is generally the case for all forms of real estate financing, an equity ratio of at least twenty percent is advisable. Who would like to finance a house worth 200,000 euros, would receive from the bank in return for the mortgage a loan of 120,000 euros (sixty percent of real estate value). So there remains a financing gap of 80,000 euros, which – depending on the equity ratio – must be concluded via a more or less high loan without mortgage. This in turn reduces the risk of the bank and allows for better terms.
The so-called mortgage interest rate is not equal to the interest rate agreed for the mortgage loan, but is initially a purely calculated size. He is about fifteen percent. If the mortgage loan is repaid regularly and easily, the mortgage interest rate is irrelevant. Only when it comes to a forced auction due to insolvency, the open claims of the bank are increased by this interest rate.
A mortgage is a so-called judicial title – in the event of insolvency of the borrower, the bank has the immediate right of enforcement. Of course, this right will only be enforced after the contractually agreed payment default in the form of a receivership (real estate from which revenue is generated) or foreclosure.
If several mortgage rights are registered on the property in the land register, then in the case of insolvency the ranking is important – the first registered mortgage is satisfied first from the proceeds, then only the second and so on. Although already encumbered real estate can serve as collateral for a mortgage loan, the bank will then rate a higher interest rate because a subordinated loan carries greater risk. Incidentally, mortgage loans can be awarded due to the high level of security even if the credit bureau entry is negative.
Difference between mortgage and mortgage loan
The main difference between a mortgage loan and a mortgage loan is that the latter is not earmarked. Although it is mostly used for real estate financing, it can also serve to replace other loans (thanks to the low installments and long term a cheap solution) or be used for other purposes.
Construction measures such as an energy-efficient renovation increase the value of the property and thus the mortgage. However, some banks have a clause in the mortgage loan contracts that the loan must be earmarked. Debt-free and unencumbered land and real estate can, in principle, serve as collateral for a mortgage loan without earmarking.
While the mortgage is tied to the current level of credit, that is, decreases as the loan is repaid, land charges are fixed and not tied to the mortgage loan. The mortgage does not automatically expire after repayment of the loan and does not necessarily have to be deleted from the land register. It is more flexible than the mortgage because it can either serve as collateral for new loans or be transferred to a new collateral taker.
Procedure and variants of mortgage loans
Before the application for registration of the mortgage is made, the mortgage loan contract must first be signed. A notary initiates the certification and entry in the land register. If the mortgage is registered, the lending bank receives the current excerpt from the land register and a copy of the document. Only then will the loan amount be paid out. The entire process should be estimated at about six to eight weeks to avoid possible default interest towards the seller of the property.
Usually the Land Registry Office issues a mortgage note (alternatively there is also a land charge – all changes must be made directly in the land register), which can be transferred to another creditor even without registration in the land register.
This means that from the land register not necessarily the current owner of the land charge is apparent. A mortgage agreement is attached to the mortgage – this defines the claims for which the bank can claim the mortgage. As a rule, the bank requires a broader collateral agreement that covers not only the claims arising from the actual mortgage loan (close collateral agreement), but also all other current or future receivables.
In principle, there are three subforms:
- Owner land charge: The owner lays down the land charge and thus holds the first-ranking mortgage, which he can assign or pledge at any time.
- Foreign land charge: The land charge is registered in favor of a third party (in the case of a mortgage loan in favor of the lending bank).
- Security deposit: The mortgage serves to secure a specific claim that is defined in the security contract.
Costs for land register entry and notary
In principle, land register entries incur costs for both a notary and the fees of the Land Registry. For real estate financing, the rule of thumb is that the costs of registering the mortgage amount to approximately two percent of the purchase price. For financings below 50,000 euros, the percentage is slightly higher, with sums over 50,000 euros, it drops slightly.
The amount of the mortgage that is registered depends on the amount of the mortgage loan. In addition to the notional value, banks also enter interest and other receivables, so that the principal and all additional costs are hedged.
Land charge: cancellation or not?
Unlike the mortgage, the mortgage does not automatically “disappear” when the mortgage loan is paid off. Anyone who does not cancel the mortgage remains in the land register, the lending bank as a senior creditors. However, no-one has to worry about the bank still having the right to foreclosure even after the loan has been repaid – of course it would first have to prove that the loan has not been repaid and that it still has outstanding claims.
Therefore it can be an advantage to keep the mortgage still in the land register even if the debt is completely repaid. The deletion costs money as well as a later possibly desired new entry (as security for another loan). On the other hand, if the land charge is recorded in the land register, the owner of the property can simply transfer the mortgage to a new creditor, for example another bank.
So if you want to use the once entered land charge as collateral for future financing, you should not delete it. Only a cancellation authorization should be requested from the lending bank, which declares the repayment of the loan and their consent to the cancellation of the mortgage.
In principle, real estate may only be sold debt-free – in this case, the cancellation of the mortgage should be linked to the transfer of ownership, which saves costs. Since mortgages have to be paid off before the sale of a property, but the owner of the mortgage must always agree to the eradication, it can be beneficial in inheritance litigation if the owner transfers the mortgage to himself. So, after repayment of the mortgage loan, he would have an unpolluted house, to which, however, a mortgage has been registered which prevents the sale.