Real estate projects are capital-intensive. Lenders require collateral for financing: the mortgage lien. The mortgage lien defines the framework conditions for agreements between creditors and debtors. For example, it determines whether a piece of real estate may be pledged as security and if so, up to what maximum amount.
Pledging is an extremely old concept: Creditors receive a pledge from their debtors as collateral. In return, they are prepared to lend higher amounts of money. The pledge serves as realizable collateral for the creditor if the debtor is unable to pay. However, pledged land cannot simply be handed over, which is why mortgage liens arose as a way of securing debts. Today, they are an integral part of real estate financing.
The maximum amount up to which a piece of land can be used as a mortgage lien is recorded in the land register. When clients take out a mortgage to purchase, build or renovate a property, the credit institute receives a financial receivable and the mortgage lien to the plot of land. The mortgage lien thereby secures the mortgage.
In addition to a plot of land, the mortgage lien may also cover condominium ownership, co-ownership or building rights. Everything on a plot of land is considered to be pledged, including for example any fruit trees growing on it. In addition, rent and rental interest are included in the pledge if the borrower is unable to meet their obligations. Nevertheless, the owners remain in possession of the property and can use it.
It’s important to remember that a mortgage lien only exists once there is an entry in the land register. Prior to this, a notary must publicly certify the relevant contract.
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Since the changes introduced in 2012, Swiss law recognizes two types of mortgage lien: mortgage certificates and mortgage contracts.
In most cases, a mortgage certificate is used as collateral when banks finance a property. The certificate records the bank’s (lender’s) claim and the property lien. The pledged plot of land or property is used as collateral.
There are basically two types of mortgage certificate:
The mortgage contract is the “lite” version of the mortgage lien: Unlike the mortgage certificate, it is not a security. It serves as collateral for the money owed. It is a contract which must be publicly certified and entered in the land register.
Mortgage contracts for mortgage loans used to be popular in a number of different cantons. Today, however, register mortgage certificates are preferred in almost all cantons. One exception is the canton of Geneva, where paper mortgage certificates are issued for cost reasons.
The main advantage of the mortgage certificate over a mortgage contract is that it is easier to transfer, and a loan backed by a mortgage can be increased at any time. This provides for legal security.
The mortgage lien can be recorded in two ways: Either the receivable amount (“capital mortgage”) or a certain maximum amount (“maximum mortgage”) are stated in the land register.
In the case of a capital mortgage, the mortgage lien serves as collateral for the lender. It secures the capital claim and any collection costs, as well as any default interest. A special feature of mortgage certificates is that only the interest actually owed is pledged. According to the law, the pledged interest rate agreed upon may not be increased above five percent “to the detriment of subsequent mortgage holders.”
The maximum mortgage is more flexible. It sets the upper limit, including interest and costs. The mortgage lien can be used to secure current, future and potential receivables up to the maximum amount at any time.
Whether capital or maximum mortgage, in many cases an interest rate or maximum interest rate is also entered in the land register. Depending on the canton, regulations governing maximum interest rates apply. The parties decide the effective – usually lower – interest rates in a separate contract that is not recorded in the land register.
Apart from a few exceptions, mortgage liens arise through an entry in the land register. But how is an entry made?
First, the bank or a notary draws up a written pledge agreement. This is on condition that the plot of land is entered in the land register. The owners of the land must have a notary publicly certify the pledge agreement.
The notary can then file a written application in the land registry for registration of the mortgage lien. In many places, this step is quite simple in practice, as the same authorities manage the notary and the land register in numerous cantons. The registration fees vary from canton to canton.
As soon as the financing provider receives the land registry’s confirmation, the provider can release the loan amount.
Anyone who wants to revoke a mortgage lien must explicitly register this request with the land registry. To do so, they require the approval of the previous lender. A mortgage certificate or a mortgage contract is not automatically terminated when all claims have been settled.
It is therefore advisable to be very diligent with paper mortgage certificates in particular. This is because the land registry can only change or delete the certificates if they exist. If the paper is lost, there is a risk of a lengthy process for declaring the security invalid, by which a court declares a security to be “powerless” to protect the debtor.
In general, however, with mortgage certificates the nominal amount will ideally remain after payment of the debt. The mortgage certificate can then be issued to you or the register mortgage certificate transferred to your own name. In this way, the mortgage certificate can be used again if necessary (for example for a building extension), saving considerable effort and expense.
If a debtor does not pay, the mortgage holder can assert their claim in court. First, a summons to pay is issued to the debtor by the debt enforcement and bankruptcy authorities. The debtor can then acknowledge or dispute the claim. If payment is not made, the creditor can apply to the debt enforcement and bankruptcy authorities to realize the pledge. If this is approved, a forced sale usually takes place after six months. This is how the creditor gets their money. A mortgage lien therefore does not mean that ownership of the property is transferred to the creditor. They simply have the option of buying the property during a forced sale.
Depending on how accommodating the creditor is, longer deadlines for debt repayment are sometimes granted. Sometimes the debtor is also allowed to sell the pledged property. They can then use the proceeds to settle the claim.
In mortgage lending, collateral agreements are standard, whereby the debtor transfers ownership of the mortgage certificate to the lender, i.e., the mortgage institution. However, the lender may only use the mortgage certificate within the framework of their agreed claims. Once these claims have been settled, they must transfer the mortgage certificate back to the debtor.
For the debtor, the collateral agreement means that a property can simultaneously serve as collateral for several of the lender’s claims.
A mortgage lien is a right that transfers rights to a piece of real estate from a debtor to a creditor. The real estate is used as collateral. It serves as security for the creditor (e.g. a bank) if the debtor is unable to settle their claims.
If the debtor fails to meet their obligations or repay a loan, the creditor can realize the pledge to obtain their money. However, the real estate does not become the property of the creditor. At best, they can acquire it during a forced sale.
The term mortgage is often used instead of the correct terms mortgage contract or mortgage certificate, i.e., the different types of mortgage lien. Strictly speaking, a mortgage consists of the creditor’s financial receivable and the mortgage lien to the plot of land.
A mortgage debt is an encumbrance on a property that corresponds to the loan amount. However, the mortgage debt is not reduced by the repayment of the loan. The amount remains the same and can be used again as loan collateral once the first loan has been repaid in full.
