Real estate financing: What is meant by mortgage?

The most important thing in brief:

• Ultimately, access means: If you can no longer or do not want to pay your debts, the bank can have your property foreclosed on and keep the part of the proceeds necessary to pay off the debts.
• In this case, one usually speaks of a “mortgage loan”, but a mortgage almost always serves as security.

Difference between land charge and mortgage

The important difference: The mortgage is tied to the amount of the loan claim secured with it and therefore always corresponds exactly to the current status of the credit account. Once the last installment has been paid, the mortgage expires automatically.

The mortgage However, it is independent of the status of the loan and exists until it is deleted from the land register. The deletion is marked by the corresponding land charge entry being underlined in red.

The mortgage has become established in lending practice because it is easier to handle, especially for banks. If a mortgage is registered, if the borrower becomes insolvent, the bank must first prove that the borrower still has outstanding debts, otherwise the mortgage would be invalid. When secured through land charges, outstanding debts can be enforced more quickly without having to initiate time-consuming legal proceedings beforehand.

Entry in the land register

Land charges are entered in the land register, where they can be viewed by anyone who can demonstrate a legitimate interest – for example, intention to purchase. The land register enjoys “public faith” and everyone can therefore assume that what is written in the land register is true.

Important: The registration of a land charge is expensively invoiced by the notary and the land registry office. Depending on the amount of the mortgage, the costs can range from a few hundred to over a thousand euros.

Assignment upon bank change

The banks can pass on land charges to each other, which either happens without an entry in the land register in the form of a private written assignment or is noted in the land register. This is the case, for example, if you change banks for building financing after the fixed interest period has expired because you received a cheaper offer from another institution. Instead of carrying out an expensive deletion and re-entry, the first bank in the land register remains as the mortgage holder and transfers these rights to the bank that carries out the new financing.

The different ranks

The different “ranks” of the mortgages determine the order in which the creditors come into play. The following principle applies to a compulsory auction: whoever securitizes their claims first will be the first to receive their money.

If a house is encumbered with 100,000 euros from Bank A, 50,000 euros from Bank B and 50,000 euros from Bank C and the proceeds of the foreclosure auction are 175,000 euros, Bank C can write off half of its claims if their mortgage was registered last. For this reason, banks are particularly keen on being first in the land register. The best conditions are available for first-class land charges – this is intended to motivate the customer to provide the best possible security.

The respective rank of a mortgage is determined from the Lending value calculated as follows: Up to 60% of the loan value is considered first-tier, the range between 60 and 80% is referred to as second-tier.

Mortgage banks prefer first-tier secured loans, while building societies usually settle for second-tier secured loans. To determine the mortgage lending value, a risk discount of around 20% is usually deducted from the current market value – which usually corresponds to the purchase price.

Determination of the mortgage ranks

The determination of the mortgage ranks can look like this, for example: