Mortgage liens – the foundation of real estate financing
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.
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 paper mortgage certificate is a security created by the land registry and entered in the land register. It may be in the name of the owner or in the name of another person. Certificates in the name of the owner need only be presented to assert their rights. By contrast, the holder of a registered security must be able to prove their identity to actually be entitled to the defined rights.
- Paperless register mortgage certificates have now become the norm. They are no longer securitized but they must still be publicly certified. The lien only exists afterwards, following an entry by the lender in the land register. Register mortgage certificates can only be issued in one name.
How to record a mortgage lien
“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.
How can a mortgage lien be waived?
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.
Collateral agreements in banking practice
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.