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Real estate financing
Mortgages provide creditors with security for real estate financing in the event that their debtors become insolvent. Pledged plots of land cannot simply be transferred, which is why the mortgage is registered as a mortgage lien.
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The amount up to which a plot 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 institution is given a financial receivable – and the mortgage lien to the plot of land. The mortgage lien thereby secures the mortgage.
The concept of pledging is extremely old: 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 creditors if their debtors are unable to pay. However, pledged plots of land cannot simply be transferred, which is why mortgage liens arose as a way of securing the debt. Today, they are an integral part of real estate financing.
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Since the amendments introduced in 2012, Swiss law has recognized two types of mortgage lien: mortgage certificates and mortgage contracts.
In most cases, a mortgage certificate is used as a way to secure the loan when banks finance a property. The mortgage certificate records the bank’s (creditor’s) claim and the right of lien. The pledged plot of land or property serves as collateral.
The mortgage contract is the “lite” version of the mortgage lien. Unlike the mortgage certificate, it is not a security and serves as collateral for the money owed. It is a contract that must be publicly certified and entered in the land register.
Mortgage contracts for mortgage loans used to be popular in a number of cantons. Nowadays, 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 secured by a mortgage can be increased at any time. This creates legal certainty.
How do I determine the value of a property? And which mortgage is right for me? We’ve summarized the most important information on financing your own home.
You can have the mortgage lien recorded in one of two ways: either the receivable amount (“capital mortgage”) or a certain maximum amount (“maximum mortgage”) is stated in the land register.
Capital mortgage
In the case of a capital mortgage, the mortgage lien serves as collateral for the creditors. It secures the principal and any debt enforcement costs, as well as any default interest. The mortgage certificate is a special case: it only secures the interest actually owed. Pursuant to the law, the agreed interest rate secured by the lien must not be increased by more than 5% “to the detriment of subordinate mortgage creditors.”
Maximum mortgage
The maximum mortgage is more flexible. It sets the upper limit, including interest and costs. The mortgage lien can be used at any time to secure current, future and potential receivables up to the maximum amount.
Whether the mortgage lien covers a capital mortgage or a 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 agree the actual interest rate, which is usually lower, in a separate contract that is not recorded in the land register.
Apart from a few exceptions, mortgage liens are created by being recorded in the land register. But what’s the process for recording a lien?
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. As the owner of the plot of land, you must have a notary publicly certify the pledge agreement.
The notary can then file a written application to the land registry for the mortgage lien to be recorded in the land register. In many cantons, this step is quite simple in practice as the same authorities manage the notary office and the land register. The registration fees vary from canton to canton.
As soon as the financing provider receives the land registry’s confirmation, it can release the loan amount.
If you wish to revoke a mortgage lien, you must explicitly register this request with the land registry. You will need to get the approval of the existing creditor to do so. A mortgage certificate or a mortgage contract does not automatically expire 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 certificate if they have the actual document. If the paper certificate is lost, there is the risk of a lengthy process to have it declared invalid. As part of this process, a court declares a security to no longer be valid in order to protect the debtor.
In general, however, it can be to your advantage for the nominal amount of the mortgage certificate to remain after the debt has been paid. The paper mortgage certificate can then be given to you or you can have the register mortgage certificate transferred to your own name. This gives you the option of being able to use the mortgage certificate again if you need to, for example, if you decide to add an extension to your home, saving you effort and expense.
If debtors don’t pay what they owe, mortgage lien holders can assert their claims in court.
First, a summons to pay is issued by the debt enforcement and bankruptcy authorities to the debtors. They can acknowledge or dispute the claim.
If payment is not made, the creditors 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 creditors get their money.
A mortgage lien therefore does not mean that ownership of the property is transferred to creditors. They simply have the option of bidding on the property during a forced sale.
Depending on how accommodating they are, creditors sometimes grant longer deadlines for debt repayment. Sometimes the debtors are allowed to sell the mortgaged 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 creditor, i.e. the mortgage institution.
However, the creditor may only use the mortgage certificate within the framework of the agreed collateral for their claims. Once these claims have been settled, they must transfer the mortgage certificate back to the debtor.
For debtors, the collateral agreement means that a property can simultaneously serve as collateral for several of the creditor’s claims.
A mortgage lien transfers rights associated with a plot of land, condominium ownership, co-ownership or a leasehold – from debtors to their creditors. The property is pledged as security and serves as collateral for the creditors in the event that the debtor is unable to pay their debts. If debtors fail to meet their obligations or repay a loan, creditors may realize the pledge to obtain their money.
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