What is a mortgage?
The term mortgage is used in connection with real estate financing. For example, if you take out home finance, this can take the form of a mortgage or a classic annuity loan. The latter is the most common form of real estate financing today. Taking out a mortgage therefore means:
- The lender, i.e. the bank, finances the purchase of a property for you as a borrower.
- The bank provides you with a certain amount for this as a mortgage loan.
- In return, you give the lender the right to sell the property should you be unable to repay the mortgage loan.
From a legal point of view, the mortgage is a mortgage and serves as a security for the lender against the risk of default. In the event of the borrower’s insolvency, the lien gives the lender the right to pledge the land or property on it in order to get his money.
Take out a mortgage – what does it mean?
When the term “take out a mortgage” is used, it usually means financing a property. Taking out a mortgage can also mean that you, as the owner of the house, want to mortgage your house in order to finance something – for example, a renovation measure on your property. Correctly, in both cases it should actually be said that a mortgage loan with a mortgage is taken up. Since this is a right in connection with a property purchase, the mortgage is always entered in the land register. That is regulated by the notary. He transfers the information required for the entry to the responsible land registry. When registering the mortgage, the land registry notes
- the creditor,
- the amount of the claim,
- the interest rate and
- all fringe benefits with their value.
The land registry office also issues the creditor with a certificate, the mortgage letter. This is why experts call this type of mortgage a letter mortgage. The opposite of a letter mortgage is a book mortgage, which is simply 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 only transfer his claims by handing over the mortgage letter – i.e. without having to enter it again in the land register – and a written declaration of assignment. This is necessary, among other things, if, as a borrower, you choose cheaper follow-up financing from another bank after the fixed interest period has expired. The letter mortgage saves everyone involved and is cheaper than the assignment of a book mortgage, which would have to be entered in the land register again with costs.
The mortgage with mortgage, an expiry model
Contrary to popular belief, the mortgage only serves as credit protection in a few cases. Today, the land charge often takes its place – as is the case with classic construction financing with annuity loans. This is namely easier for banks to handle. Industry experts assume that only 20% of all mortgages are secured as a mortgage. The remaining properties are pledged over a land charge.
Difference between mortgage and mortgage
Like the mortgage, the mortgage is a mortgage, but has the following differences:
- While a mortgage loan with a mortgage is tied to a specific claim, it is not the mortgage.
- The mortgage with mortgages decreases with the gradual repayment of the loan – to the same extent as the loan debt decreases. If, for example, you have already paid back half of the loan, the associated mortgage is only half the loan. The land charge is different: if you repay the loan, your loan debt will of course also be reduced here, but the land charge will remain in full.
- As soon as you have paid the last installment of the mortgage loan and the debt has been paid, the mortgage expires. This means that the lender is no longer entitled to the claim, i.e. your property. In contrast, the land charge 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 benefits of mortgages over a mortgage
The mortgage is the less complex and costly variant for everyday banks, which is why it is gradually replacing the classic mortgage as a mortgage. Financing a property through a mortgage with a mortgage is therefore no longer appropriate today. However, because the term mortgage is more common, many now use it as a synonym for a mortgage.
- The advantage of the mortgage for the bank: It is particularly advantageous for the lender that a mortgage can lead to enforcement more quickly than a mortgage if the debtor is unable to pay. If the borrower defaults on a few monthly installments, the bank can initiate the foreclosure without a judicial order for payment or an attachment application.
- First advantage of the mortgage for you: You can leave a mortgage after the 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 have to pay any additional costs for the entry in the land register.
- Second advantage of the land charge for you: Even with a debt rescheduling, you do not have to have it deleted or made a new entry in the land register, which can result in fees of $ 1,000 and more. A declaration of assignment from one lender to the next is sufficient.
In the event of insolvency, enforcement threatens
If you are in arrears with the repayment of the mortgage loan, your lender is entitled to order a foreclosure or foreclosure in order to settle the remaining claims from the proceeds. The lender is granted this right with the mortgage on the mortgage. Another way for the creditor to get his money is through forced administration. Then the rental income from the property after deducting the management costs of the building is used to settle the claims.
The order of enforcement
When financing a property through a mortgage loan, a distinction is made between a first and a second-tier mortgage or a 1a mortgage or a 1b mortgage in the event of a forced auction. These terms refer to the order, the so-called rank, in which a lien like 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 when you as a borrower can no longer pay the loan. Because then the principle applies: first come, first served. If foreclosure or emergency sale of the property occurs, the creditor is the first to receive money, which is first entered in the land register. A registration in the first place therefore offers the greatest security for the donor. For first-rate mortgages, financial institutions are therefore willing to offer particularly favorable conditions. The lower the rank of the lender with his mortgage, the more expensive the loan will be.
The mortgage lending value determines the mortgage ranking
Whether it is a first or second-rate mortgage depends on the mortgage lending value of the property used as collateral. Lending value is the value of the property that the banks would receive if the property were sold. Because lenders like to be on the safe side, they usually don’t finance a property in full, but only up to the so-called mortgage lending value. Each lender determines its amount according to its own criteria. The lending limit is usually around 80% of the purchase price. This means that if you want to buy property worth $ 300,000, the bank only grants a mortgage loan of $ 240,000. You should bring the remaining 20%, i.e. $ 60,000, as equity. For some years now, however, 100% financing or construction financing without equity has been possible.
The mortgage lending limits now apply when classifying the mortgage as a 1a or 1b mortgage. Every believer determines this for himself. Some draw the lending limit at 80% of the lending value, others, however, already at 45%.
- If the loan amount is now within the lending limit, it is a first-rate mortgage.
- If the loan is between the mortgage lending limit and the mortgage lending value, one speaks of a secondary mortgage.
You have to expect these costs for a mortgage loan
Fees apply for the registration of 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 dollars. However, it is difficult to say in advance what the notary’s mortgage costs will be. As a guideline, 1.5% of the loan amount is used. This would be $ 1,500 for $ 100,000 and $ 4,500 for a loan amount of $ 300,000. In addition, mortgage interest can also be charged for the mortgage loan. In the case of foreclosure, these are intended to cover the costs incurred. 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?
Unlike a home loan, you can freely dispose of the loan amount on a mortgage loan. You decide what happens to the money. With a typical building loan, for example for a house, it is different: Here the bank pays after you have submitted the invoices for individual construction phases. In this way, the bank ensures that the loan only pays costs related to building a house.
The mortgage loan as a synonym for the classic building loan
Financial advisors refer to a shortened mortgage loan as a mortgage. The interest for this is called mortgage interest. In addition to general factors such as inflation, the amount depends on your personal credit rating as a borrower.
The mortgage loan as a fixed rate mortgage
Real estate financing via mortgage loan, in which a mortgage is deposited, is now considered obsolete. Therefore, the mortgage loan is now often used as a synonym for a home loan. The most common form of a mortgage loan is currently a construction loan in the form of an annuity loan that is secured by a mortgage. With annuity loans, the mortgage rates are fixed for a term of 5, 10 or 15 years. In technical jargon, this is also known as a fixed-rate mortgage.
Beware of variable rate mortgage loans
Instead of setting the mortgage rate, you can choose a variable rate mortgage. The interest you have to pay is regularly adjusted to the key interest rate of the Capital Lender. The advantage: These loans are cheaper than fixed-rate loans. For real estate financiers, 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 that loans with variable interest rates only be selected for small sums. In periods of high interest rates, a loan with variable interest rates can be useful to wait for falling mortgage rates.
When can a mortgage loan be canceled?
You can cancel loans with variable interest rates at any time with a notice period of 3 months. It is different with fixed-interest loans: These can only be canceled under certain conditions. Legislators can give notice if they have to sell the property or need a higher loan amount. However, the bank can then impose a kind of fine: the prepayment 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 longer, you have the right to terminate after 10 years. You can cancel with a notice period of 6 months without having to pay a prepayment penalty.
What does deletion of a mortgage or land charge mean?
Canceling a mortgage is not the same as canceling the mortgage loan. If you, as the borrower, have paid the mortgage loan, the creditor’s claim to the mortgage automatically expires. However, it remains entered in the land register – unless you as the property owner have it deleted.
To delete the land charge, you need a cancellation permit, which you will receive from your bank. You must then have this request for deletion certified by the notary. The notary will forward the deletion to the land registry. If all the requirements are met, the deletion approval will come into force.
Sometimes it is advisable to have the mortgage deleted when a property sale is planned. Because many buyers want a house that is not burdened and has a “clean” land register entry.
Take out a mortgage loan: You should be aware of this
- Bring enough own chapters: 20-30% of the loan amount is recommended.
- Building money is currently cheaper than ever: So choose a fixed-rate mortgage with the longest possible fixed interest rate.
- Choose the highest possible repayment 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.
- Arrange an option for a special repayment of 5% annually, for example, with a fixed-rate mortgage. This gives you flexibility: you can either choose to exercise the option or not.
Mortgage comparison: Find the best mortgage rates
As already mentioned, the classic mortgage loan with a mortgage is an end-of-life model and instead the mortgage is now used as a synonym for a construction loan that is secured through the mortgage. So if you take out a mortgage today, it will most likely be classic home finance. You can find the current building rates for building financing in our building money comparison. However, if you really want to take out a mortgage with a mortgage, we recommend that you speak directly to your bank advisor and seek advice.