Mortgage and land charge – the facts

Mortgage and land charge: how do these forms of collateral differ?

Many people refer to a mortgage loan when they mean a construction loan. Normally, when you finance a property, you take out a mortgage. Strictly speaking, the mortgage is a pledge to ensure that the financing bank gets its money back even if the loan is not repaid by the debtor. But the mortgage is not the only right of pdand. The land charge also serves the bank as security for the loan. However, there is an important difference.

The land charge is more flexible and easier to use than a mortgage

The land charge is regulated in § 1191 BGB (german civil code). The most important difference between a mortgage and a land charge is the fact that a land charge does not necessarily require a loan or a mortgage. A construction financing is necessary. A land charge can be registered in order to lend on your property for other forms of credit than construction financing. It is entered in the land register and can be left in place even after it has been fully repaid, so that it can be used again as collateral at a later date. Since the registration of a land charge costs fees, many borrowers leave it unregistered after it has expired.

Since a land charge is more flexible and easier to use, banks, insurance companies and building societies now almost always use it as security for a construction loan or mortgage. Of a construction loan. Normally, the basic debt is registered after the conclusion of a construction loan. Together with the loan agreement, the borrower receives the documents for the land charge registration, which a notary prepares and the land registry then enters into the land register. Fees for notary and registration are incurred. Even if the registration is deleted at a later date after the loan has been repaid in full, fees will still be payable. For many, a reason to simply leave the land charge unpaid.

A mortgage is a pledge on the property

Even if one speaks of a mortgage loan as a synonym for construction financing, a mortgage does not lend on the owner-occupied apartment or house. A mortgage is normally taken out on the property. Strictly speaking, however, it is hardly ever used. The land charge takes its place. Before granting a loan, a bank checks whether several land charges have been entered in the land register. Important: banks always have priority. D. H. In the event of a forced sale, the bank that comes first in the order of priority would receive the money thus obtained. For this reason, the bank always needs an extract from the land register before issuing the construction loan.

Irritating: the interest rate for the land charge is also listed in the land register. This is usually 15 percent. Thus far higher than the interest rate of the construction financing. This is because it is the only way the credit institution can recover a higher amount than that of the land charge at an auction. This land charge interest is therefore an additional security for the lending bank.

The mortgage on a plot of land reduces the interest rate for construction financing

Even though, strictly speaking, in the vast majority of cases the land charge serves as collateral, it is referred to as a mortgage loan. This security, which the land offers, leads to the fact that construction financing interest rates are far more favorable than interest rates of installment loans. The reason for this is that, from a financial mathematical point of view, the collateral that has been priced in means that the default risk of a construction loan for the bank is lower than that of a consumer loan. Who speaks of hypthek in the legal sense, means the security of a plot of land with and without building development. In practice, however, the basic debt plays a more important role. This is decisive from a legal point of view. You must be aware that the bank has extensive rights through the land charge. In the event of insolvency, the bank can access its assets easily and, above all, very quickly.

Incidental purchase costs and ongoing costs of owning real estate are an important measure for secure financial planning

The ancillary purchase costs, in particular the land transfer tax – but also notary fees, land register and real estate agent – make the purchase of real estate even more expensive. Despite the feeling that buying real estate is becoming more and more expensive, an index shows that today is the best time to buy a property: according to a study by the OECD, which looks at the ratio of house prices to income, in germany the ..

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