What is a Mortgage Loan
Mortgage vs. land charge - this is how the bank secures your mortgage loan
What is a Mortgage?
The term mortgage is used in connection with real estate financing. For example, if you take out construction financing for your own home, this can be in the form of a mortgage or a classic annuity loan. The latter is the most common form of real estate financing nowadays. Taking out a mortgage therefore means:
- The lender, i.e. the bank, finances the purchase of a property for you as the borrower.
- The financial institution provides you with a certain amount as a mortgage loan.
- In return, you give the lender the right to sell the property should you no longer be able to repay the mortgage loan.
From a legal point of view, the mortgage is part of the real estate lien and serves the lender as security against the risk of a loan default. In the event of the borrower's insolvency, the mortgage gives the lender the right to seize the land or property on it in order to get his money.
Take out a mortgage - what does that mean?
When the term “take out a mortgage” is used, it usually refers to the financing of a property. However, taking out a mortgage can also mean that you, as the homeowner, want to borrow money on your house to finance something - e.g. a renovation measure on your property. In both cases, correctly, it should actually be said that a mortgage loan with a lien is being drawn upon. Since this is a right in connection with a property purchase, the mortgage is always entered in the land register. The notary takes care of that. He hands over the information required for the entry to the responsible land registry. When registering the mortgage, the land registry makes a note
- the creditor,
- the amount of the claim,
- the interest rate and
- all ancillary services with their value.
In addition, the land registry issues the creditor with a deed, the mortgage letter. That is why experts also refer to this type of mortgage as a letter mortgage. The opposite of a letter mortgage is a book mortgage, which is only entered in the land register without a letter.
Letter mortgage versus book mortgage
The norm when granting a mortgage is the letter mortgage. With this variant, the creditor can assign his claims simply by handing over the mortgage letter - i.e. without re-entry in the land register - and a written declaration of assignment. This is necessary, among other things, if you as the borrower choose cheaper follow-up financing from another bank after the fixed interest period has expired. The letter mortgage saves everyone involved time and is cheaper than the assignment of a book mortgage, which would have to be re-entered in the land register for a fee.
The mortgage with a lien, an obsolete model
Contrary to popular belief, the mortgage only serves as a loan guarantee in a few cases. Today, they are often replaced by the land charge, as is the case with classic mortgage lending with annuity loans. This is because this is easier to handle for credit institutions. Industry experts assume that only 20% of all real estate liens are secured as a mortgage. The remaining properties are attached via a land charge.
Difference Between Mortgage and Land Charge
Like the mortgage, the land charge is a lien, but has the following differences:
- While a mortgage loan with a lien is tied to a specific claim, the mortgage is not.
- The mortgage with a lien decreases as the loan is repaid gradually - just as the loan debt decreases. For example, if you have already repaid half of the loan, the associated mortgage is only available in the amount of half of the loan. The land charge is different: If you repay the loan, your loan debt is of course also reduced, but the land charge remains in full.
- As soon as you have paid the last installment on the mortgage loan and the debt has been settled, the mortgage will expire. That means that the lender is no longer entitled to the claim, i.e. your property. The land charge, on the other hand, always remains in full, even if you have already repaid the loan. In both cases, the entry in the land register remains and must be deleted by the notary.
The advantages of the land charge over a mortgage
The land charge is the less time-consuming and costly variant for credit institutions in everyday life, which is why it is gradually displacing the classic mortgage as a lien. Financing a property with a mortgage with a lien is therefore no longer appropriate these days. However, because the term mortgage is more common, many today use it as a synonym for a land charge.
- The advantage of the land charge for the bank: It is particularly advantageous for the lender that a land charge can lead to foreclosure more quickly if the debtor is unable to pay than a mortgage. If the borrower defaults on payment of a few monthly installments, the bank can initiate a foreclosure auction without a judicial dunning procedure or an application for attachment.
- First advantage of the land charge for you: You can leave a land charge in place after full repayment and use it for other purposes, for example as security for a new loan, for example for a modernization. With this variant, you will not incur any additional costs for the entry in the land register.
- Second advantage of the land charge for you: Even with a rescheduling, you do not have to have a deletion or a new entry made in the land register, which can result in fees of € 1,000 and more. A letter of assignment from one lender to the next is sufficient.
In the event of insolvency, there is a risk of foreclosure
If you fall behind with the repayment of the mortgage loan, your lender is entitled to order a foreclosure sale or foreclosure in order to settle the remaining claims with the proceeds. This right is granted to the lender with the mortgage lien. Another way for the creditor to get his money is through receivership. Then the rental income from the property, after deducting the management costs of the building, is used to settle the claims.
The order of precedence in foreclosure
When financing a property with a mortgage loan, in the case of a foreclosure sale, a distinction is made between a first-rate and second-rate mortgage or a 1a mortgage or 1b mortgage. These terms relate to the order, the so-called rank, in which a real estate lien such as the mortgage is in Section III of the land register. An object can be burdened with several mortgages.
The order of the land register entries becomes important if you as the borrower can no longer pay the loan. Because then the principle applies: first come, first served. If the property is foreclosed or sold in an emergency, the creditor will be the first to receive money, which is entered in the land register first. An entry in the first place offers the greatest security for the financier. Financial institutions are therefore prepared to offer particularly favorable terms for first-rate mortgages. The further down the rank of the lender with his mortgage, the more expensive the loan becomes.
Mortgage lending value determines the ranking of the mortgage
Whether it is a first or second rate mortgage depends on the lending value of the property used as collateral. The mortgage lending value is the value of the property that the banks would receive if the property were sold. Because lenders like to play it safe, they usually do not finance a property in full, but only up to the so-called mortgage lending value. Each lender determines the amount according to their own criteria. Usually the lending limit is around 80% of the purchase price. This means that if you want to buy a property worth € 400,000, the bank will only give you a mortgage loan of € 320,000. You should bring the remaining 20%, i.e. € 80,000, with you as equity. For some years now, 100% financing or construction financing without equity has been possible.
For the classification of the real estate lien as a 1a or 1b mortgage, the lending limits now apply. Each believer also determines that for himself. Some draw the lending limit at 80% of the lending value, while others draw it at 45%.
- If the loan amount is within the lending limit, it is a first-rate mortgage.
- If the loan is between the lending limit and the lending value, it is referred to as a secondary mortgage.
These are the costs you must expect with the mortgage loan
There are fees for entering the mortgage in the land register. The amount of the fees depends on the amount of the loan to be secured. The fees can range from several hundred to over a thousand euros. However, it is difficult to say in advance what the notary costs of the mortgage will be. 1.5% of the loan amount is used as a guideline. With 200,000 € this would be 3,000 €, with 400,000 € loan amount already 6,000 €. In addition, mortgage interest can also be charged for the mortgage loan. These are intended to cover the costs incurred in the event of foreclosure. The amount of the land charge is between 5% - 10% of the debt amount and is calculated annually.
What is the difference between a mortgage loan and a home loan?
In contrast to a building loan, with a mortgage loan you can freely dispose of the loan amount. You determine what happens to the money. With a typical building loan, for example for building a house, it is different: Here the bank pays after you have presented the invoices for individual construction phases. In this way, the bank ensures that the loan only pays for house building costs.
The mortgage loan as a synonym for the classic home loan
What financial advisors refer to as a mortgage shortens a mortgage loan. The interest for this is called mortgage interest accordingly. The amount depends not only on general influencing factors such as inflation but also on your personal creditworthiness as a borrower.
The mortgage loan as a fixed rate mortgage
A real estate financing by mortgage loan, with which a mortgage is deposited, is nowadays considered obsolete. That is why the mortgage loan is now widely used as a synonym for a home loan. The most common form of a mortgage loan is currently a building loan in the form of an annuity loan, which is secured by a land charge. With the annuity loan, the mortgage interest is fixed for a term of 5, 10 or 15 years. In technical jargon, this is also known as a fixed-rate mortgage.
Beware of adjustable rate mortgage loans
Instead of locking in mortgage rates, you can choose a variable rate mortgage loan. The interest you have to pay is regularly adjusted to the key interest rate of the European Central Bank. The advantage: These loans are cheaper than fixed-rate loans. For real estate financiers, however, the variable interest rate also harbors an immense risk: if the interest rate increases, it can quickly exceed your budget. In the current phase of low interest rates, experts therefore advise choosing loans with variable interest rates only for small sums. In times of high interest rates, a variable rate loan can be useful to wait for mortgage rates to fall.
When can a mortgage loan be canceled?
You can cancel loans with variable interest at any time with 3 months' notice. It is different with fixed-rate loans: These can only be terminated under certain conditions. The legislature allows you to give notice if you have to sell the property or if you need a higher loan amount. However, the bank can then demand a kind of fine: the early repayment penalty. The amount of this compensation depends on the remaining term of the loan, the agreed interest rate and the current interest rate. If you have chosen a fixed interest rate of 10 years or more, you have the right to terminate the contract after the 10 years have elapsed. You can cancel with 6 months' notice without having to pay a prepayment penalty.
What is meant by the cancellation of a mortgage or land charge?
Deleting a mortgage is not the same as terminating the mortgage loan. When you, as the borrower, have paid off the mortgage loan, the creditor's right to the mortgage automatically expires. However, it remains registered in the land register - unless you, the property owner, have it deleted.
To delete the land charge, you need a cancellation permit, which you can obtain from your bank. You must then have this cancellation request certified by the notary. The notary forwards the deletion to the land registry. If all requirements are met, the deletion authorization comes into effect.
Sometimes it is advisable to have the land charge deleted when a property sale is planned. Because many buyers want a house that is not encumbered and has a "clean" entry in the land register.
Taking out a mortgage loan: what to keep in mind
- Bring in enough equity: 20-30% of the loan amount is recommended.
- Construction money is currently cheaper than ever: Choose a fixed-rate mortgage with a fixed interest rate as long as possible.
- Choose as high a repayment as possible so that you can get out of debt faster. But don't overdo it: you should be able to handle the rates well. They should not make up more than 40% of net income.
- For a fixed-rate mortgage, agree on an option for a special repayment of e.g. 5% annually. This gives you flexibility: you may or may not take the option.
Mortgage Comparison: Find the Best Mortgage Rates
As already mentioned, the classic mortgage loan with a charge on property is being phased out and instead the mortgage is now used as a synonym for a building loan that is secured by the land charge. So if you take out a mortgage today, it will most likely be a classic home loan. You can find the current building interest rates for a mortgage in our building money comparison. If, on the other hand, you really want to take out a mortgage with a lien, we recommend that you speak to your bank advisor directly and get advice.
Basically, when taking out a mortgage loan, the following applies: if you compare, you will find the cheapest offer. In addition to the effective interest rate, be sure to also compare the remaining debt at the end of the agreed fixed interest period. In this way you can see at a glance which offer has the lowest ancillary financing costs and is therefore the cheapest.
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