Bank's Approach to Mortgage Security: Comparing Different Mortgage Loan Methods
A mortgage is a loan from a financial institution used to finance the purchase of real estate. The borrower repays the loan over time with interest, and the lender holds a lien or mortgage on the property as security. On the other hand, a land charge is a legal interest or encumbrance recorded against the land which secures a debt or obligation.
Mortgages: The Basics
A mortgage typically involves a lender and borrower contract where the lender lends money specifically for buying or refinancing real estate, and the loan is repaid over a set term with interest. If the borrower defaults, the lender may initiate foreclosure.
Land Charges: A Broad Concept
A land charge is a legal interest registered against the property title that secures an obligation or debt. It does not inherently require a lender-borrower relationship like a mortgage and may represent various types of secured interests. A mortgage itself is a form of land charge, being a specific legal charge created by a mortgage deed.
Key Differences
Mortgages involve specific loan terms and repayment schedules, whereas a land charge is a legal right over land that ensures payment of an obligation but may vary in form, scope, and enforcement processes.
Mortgage Loans Today
The most common form of a home loan is currently a mortgage loan in the form of an annuity loan, which is secured by a mortgage. With an annuity loan, the mortgage interest is fixed for a period of 5, 10, or 15 years. Mortgage money is currently cheaper than ever, and it's recommended to choose a fixed-rate mortgage with as long a fixed interest period as possible.
Cancelling a Mortgage
You can cancel a mortgage loan, but it's important to note that this is not the same as cancelling the mortgage. To cancel a mortgage, you need a cancellation permit, which you can obtain from your credit institution. You then have to have this cancellation application authenticated by a notary, and the notary forwards the cancellation to the land registry office.
Land Charges and Property Sales
Sometimes, it is advisable to have the land charge cancelled when planning to sell a property. Many buyers prefer a house that is not encumbered and has a "clean" land registry entry.
Equity and Loan Amounts
By law, you can cancel if you have to sell the property or need a higher loan amount. Bringing in enough equity capital is recommended when taking out a mortgage, with 20-30% of the loan amount suggested. If you want to buy a property worth 400,000 €, the bank will only grant a mortgage loan of 320,000 €.
Fixed-Rate Mortgages and Early Repayment
For a fixed-rate mortgage, agree on an option for extra repayment of, for example, 5% annually. However, the bank can demand a kind of penalty: the early repayment charge.
Current Mortgage Interest Rates
The interest rate you have to pay is regularly adjusted to the prime rate of the European Central Bank. The interest for a mortgage is called mortgage interest.
Land Charge Registration and Fees
For the registration of a mortgage in the land register, fees are due. The amount of the fees depends on the amount of the loan to be secured. However, the land charge remains registered in the land register - unless you, as the property owner, have it cancelled.
Outdated Real Estate Financing Methods
A real estate financing through a home loan, where a mortgage is pledged, is now considered outdated. Instead, it's more common to take out a mortgage loan, which is a more structured and standardised method of financing property purchases.
[1] [2] [3] [4] [5] (Sources for further reading)
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