Securing a Real Estate Loan with a Property Lien
To secure the bank when granting a real estate loan, a land charge or mortgage is typically registered in the land register. Both of these are types of property liens, but they have legal differences.
Without taking out a loan, purchasing a property is generally not possible. Since the bank is taking on a risk by granting the loan, it is granted a property lien for security. The registration of the land charge or mortgage in the land register gives the bank the right to auction the property if the borrower is unable to pay the installments, as explained by the business law firm MTR Legal, which provides advice in banking law.
Land Charge – More Flexible
There are legal differences between land charges and mortgages that borrowers should consider when entering into a real estate financing agreement. The advantage of the land charge is that it is not tied to a specific purpose. This means that the borrower can use the land charge not only for the purchase of the property but also for other financing as security.
The land charge is registered in the land register with the consent of the property owner, through a notary. The certificate land charge is a special form in which the notary also issues a certificate for the land charge. This certificate can be transferred to another creditor, which has the advantage that a new entry in the land register is not required. However, claims can only be made by the holder of the certificate land charge.
Mortgage Tied to a Specific Purpose
The mortgage cannot be used as flexibly as a land charge. It is always tied to a specific loan that it secures. Once the borrower has repaid the specific loan, the mortgage can no longer be used to secure other financing. There is a distinction between fixed-rate mortgages and variable mortgages. While the interest rate and term are fixed with a fixed-rate mortgage, they fluctuate with a variable mortgage. The relevant parameters for interest rates and terms are the developments on the capital market. This can offer advantages for the borrower but also carries a higher risk.
Advantages of the Land Charge
The land charge is often preferred over the mortgage because it can be used more flexibly and interest rates can often be adjusted more easily. While the mortgage term is generally tied to the term of the loan, the land charge remains in place until all claims associated with it are settled.
Additionally, the land charge can only be terminated extraordinarily by the bank. A reason for extraordinary termination could be if the borrower’s financial situation deteriorates. If the bank wants to terminate the loan, it must also terminate the land charge.
Termination of the Land Charge
The termination of the land charge by the bank is generally possible if the customer’s financial situation has worsened, the value of the collateral has declined, or if they are in arrears with the installments.
What complicates the situation for the bank customer is that the deterioration of their assets does not have to have already occurred for the bank to be able to terminate the land charge. It is sufficient if the deterioration is merely impending.
The land charge is a security that the borrower provides when taking out a real estate loan. If the property loses value for any reason, the value of the land charge and, thus, the provided collateral, decreases.
The most common reason for the termination of the land charge by the bank is that the bank customer is in arrears with their payments. However, banks must first send a reminder of the outstanding payments before they are allowed to terminate the agreement. Additionally, the borrower must be at least two consecutive payments behind before the bank is entitled to terminate the agreement. Furthermore, the bank must grant the borrower at least two weeks to make up the arrears.
A borrower should weigh whether the mortgage or the land charge is the better option for them. MTR Legal attorneys provide advice on land charges, mortgages, and other issues related to banking law.
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