Real estate projects are capital-intensive. For the provider to assist with financing, some form of collateral is required, the scope of which is laid down by a mortgage lien.
A mortgage lien 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: In return for a pledge, lenders lend higher amounts of money because they have the security of knowing that they can realize the pledge, should the borrower be unable to pay. However, pledged land cannot simply be handed over, which is why mortgage liens arose as a way of securing debts.
In a land register, lenders and borrowers record the maximum amount a piece of land can be used as a mortgage lien. 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.
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, rents 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.
Important: 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 to Swiss law in 2012, there are two types of mortgage lien: mortgage contracts and mortgage certificates.
In most cases, the 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 now 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 and its only function is as collateral for the money owed. This 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, register mortgage certificates are preferred in all cantons, with the exception of Geneva where paper mortgage certificates are created, due to fees.
What are the main advantages of a mortgage certificate over a mortgage contract? The note can be transferred more easily and it’s always possible to increase a loan if backed by a mortgage. 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 serves as collateral for the lender’s capital claim, any recovery costs, interest on late payments – for three years of interest plus current 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.
Whether capital or maximum mortgage, in many cases an interest rate or maximum interest rate is 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 part of the title deeds.
“No mortgage lien, no loan,” is the motto of mortgage providers. 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.
Thereafter, the notary can file a written application in the land registry for registration of the mortgage lien. In many places, this step is rather simple because in numerous cantons, the same authorities manage the notary and the land register. 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.
When a debtor pays all claims, a mortgage certificate or a mortgage contract is not automatically terminated. If an owner wants to revoke the mortgage lien, they must explicitly register this request with the land registry. To do so, they require the approval of the previous lender.
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 and used again if necessary (for example for a building extension) saving considerable effort and expense.
In mortgage lending, collateral agreements are standard, whereby the debtor transfers ownership of the mortgage certification 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.
