Mortgage

In our guide, we explain the basics of a mortgage in a simple way. A mortgage is a fundamental tool in the world of real estate financing and plays a crucial role in home buying and ownership. Discover how mortgages work, what types there are and what role they play in financing real estate.

Mortgage Definition: Origin of the term

The term "mortgage" comes from the Old French words "mort" (dead) and "gage" (pledge), which together mean "dead pledge." This term originated in the Middle Ages.

The concept behind a "dead pledge" is that the pledge ends (dies) in two scenarios: either the obligation is fulfilled, and the property's ownership is transferred to the borrower, or the property is taken through foreclosure due to failure to meet the agreed-upon terms, effectively ending the borrower's right to the property. The term has evolved over the centuries, but the basic concept of a mortgage being a secured loan against property remains the same. In modern terms, a mortgage is a loan obtained to purchase real estate, where the property itself serves as collateral for the loan.

What is a Mortgage?

A mortgage is a legal lien on land or property that is granted to a lender as security for the repayment of a loan. In simpler terms, a mortgage is a loan where you offer your property or land as collateral.

The borrower undertakes to repay the loan in accordance with the agreed terms. The mortgage gives the lender the right to sell the property in the event of default by the borrower in order to settle the debt. The borrower retains possession and use of the property as long as he meets his payment obligations. Taking out a mortgage enables the borrower to make major purchases such as buying a house or financing investments by accessing the equity in the property.

What are the special features of a Mortgage?

The special features of a mortgage include:

Security: A mortgage serves as security for a loan, with the property serving as collateral. This gives the lender some security for the repayment of the loan.
Repayment: The borrower undertakes to repay the loan in accordance with the agreed terms. Repayment is usually made in regular installments over a fixed period of time.
Land register entry: To be valid, the mortgage must be entered in the land register to document the lender's lien on the property.
Foreclosure: In the event of a payment default, the lender can have the property foreclosed in order to settle its claim.
Flexibility: Mortgages can have different terms, interest rates and repayment terms to meet the needs of lenders and borrowers.
Tax considerations: In some countries, interest on mortgage loans can be tax deductible, making it an attractive financing option.

Types of Mortgages

There are different types of mortgages that differ in their features and terms. Each type of mortgage has its own advantages and disadvantages and may be better suited to the borrower's individual needs and circumstances.

Known Types of Mortgages

The following table provides a summary of the most common types of mortgages.

Type of Mortgage	Description
Fixed-rate mortgages	With this type of mortgage, the interest rate remains constant over the entire term of the loan. This offers stability and planning security for the borrower.
Variable rate	With variable rate mortgages, the interest rate can change over time, depending on market conditions. This can lead to lower payments, but also carries the risk of rising interest rates.
Variable rate loan	With this type of mortgage, the loan is usually renewed every few years and the interest rate and term can be adjusted. This allows for some flexibility, but can lead to uncertainty about future payments.
Balloon mortgages	These mortgages have low monthly payments for a fixed period, followed by a large 'balloon' payment at the end of the term. They are suitable for borrowers who want low payments in the short term but are able to make the balloon payment.
Reverse mortgages	Reverse mortgages are aimed at older people and allow them to borrow against the value of their home without making monthly payments. The outstanding debt only becomes due when the borrower sells the home or dies.

Types of Mortgage Registration

There are also different ways of registering mortgages, which differ in their features and conditions. One type is used more often nowadays, but both are possible.

Overview of the Types of Mortgage Registration

The following diagram shows the types of mortgage registration that exist.

Explanation: The two Types of Mortgage Registration

The following two types of mortgage registration are known and have different advantages and disadvantages.

Mortgage by Letter

In the case of a mortgage by letter, the mortgage is documented by a physical mortgage certificate that is handed over to the owner of the property. The mortgage certificate contains all relevant information about the mortgage, including the amount, the creditor and the conditions.
The owner of the mortgage note has the right to cancel or transfer the mortgage by physically delivering the note to the lender or other authorized recipient.

Mortgage by Book

In contrast to a mortgage by letter, a book mortgage is registered electronically in the land register without a physical mortgage certificate being issued. Instead, all relevant mortgage information is recorded in electronic form in the land register.
The book mortgage offers faster and more efficient administration of mortgage entries, as no physical documents need to be exchanged. The rights and obligations of the parties are ensured by electronic registration.

In many countries today, the book mortgage is more commonly used as it is more modern and efficient. However, the differences between paper mortgages and book mortgages can vary depending on the legal system.

Advantages & Disadvantages
of a Mortgage

Advantages of a Mortgage	Disadvantages of a Mortgage
Enables the purchase of real estate without having to pay the entire purchase price immediately	Obligates the borrower to repay the loan, often over a long period of time
Lower monthly payments compared to rental costs in some cases	Interest payments over the life of the loan can be substantial
Interest may be tax deductible, resulting in tax benefits	Risk of foreclosure of the property in the event of late or defaulted payments
Can help build equity as the borrower gradually acquires shares of the property	High fees and costs associated with taking out and managing the mortgage
Can be used as a financing tool for investments or to consolidate debt	Interest rates and terms may vary depending on market conditions and carry the risk of payment increases

This list does not claim to be exhaustive, but provides a general overview of the advantages and disadvantages of a mortgage. The individual circumstances and needs of each borrower should be taken into account when deciding for or against a mortgage.

When is the Mortgage used?

Today, mortgages are used in various areas:

Real estate financing: The mortgage is a key component in the financing of real estate. It enables individuals and companies to acquire ownership of real estate by taking out loans from lenders and using the property as collateral.

Corporate finance: Companies often use mortgages to acquire or develop business properties such as offices, warehouses or retail space. These mortgages are used to finance long-term investments in business growth.

Reverse mortgages: In the area of personal financing, reverse mortgages are popular with older individuals who have accumulated a large amount of equity in their homes. Reverse mortgages allow these individuals to borrow against the value of their property without making monthly payments.

Government bonds: In some countries, governments can use mortgages as collateral for government bonds. These are then often referred to as mortgage bonds and are used to finance government spending.

What costs are associated with a Mortgage?

To obtain a mortgage, you should generally follow these steps:

Financial preparation: It starts with checking your financial situation, including your credit score, income and available equity. It is important to ensure that you have sufficient income and a good credit rating to qualify for a mortgage.
Mortgage comparison: The next step is to compare offers from different lenders to find the best terms for your needs. You should consider interest rates, fees, repayment options and other conditions.
Mortgage application: Next comes applying for a mortgage with your chosen lender. You will need to fill out a mortgage application and provide various documents, including proof of income, bank statements, property information, etc.
Mortgage check: The lender will check your financial situation and carry out an assessment of the property to determine whether you are eligible for the mortgage. This may include a credit check, income verification and property valuation.
Mortgage approval: If the lender approves the application, you will receive a mortgage approval. This states that the lender is willing to grant the loan subject to certain conditions.
Closing: After receiving the mortgage approval, the final contract documents are drawn up and signed. The mortgage is then officially registered, and you receive the loan

It is important to plan the mortgage procurement process carefully and to obtain comprehensive information about the requirements and conditions. If necessary, you should seek advice from a financial advisor or real estate expert.

Difference between Mortgage and Land Charge

This table provides a summary of the main differences between a mortgage and a land charge.

Difference	Mortgage	Land charge
Definition	A right in rem in real property granted to a lender as security for a loan. Mortgage	A right in rem in real property that serves as security for a general claim, independent of a specific loan.
Tied to loan	Is specifically tied to a particular loan. Security interest	Is not tied to a specific loan, but secures the creditor's claims in general.
Flexibility	Is deleted as soon as the loan has been repaid in full.	Can remain in place even after a loan has been repaid and can be used for further loans.
Entry in the land register	Must be entered in the land register to be valid.	Must also be entered in the land register to be valid.
Priority	Priority is determined by the date of entry in the land register. Older mortgages have priority over newer ones.	The priority is also determined by the date of entry in the land register. Older mortgages have priority over newer ones.

Is the order in the land register important?

The order in the land register plays an important role in determining the priority of rights and obligations to a property. In general, the priority principle applies, according to which older entries in the land register take precedence over newer ones. This means that creditors or other entitled parties who have entered their rights in the land register first are given preferential treatment in the event of a forced sale or other legal disputes.

The order in the land register thus determines the ranking of the various encumbrances or rights to a property, such as mortgages, land charges, easements or liens. Older entries generally take precedence over newer ones, which means that creditors or beneficiaries with older rights are better protected.

It is therefore crucial for lenders and other parties, in the case of a mortgage for example, to register their rights correctly and in good time in the land register in order to strengthen their position and ensure that they are adequately protected in the event of disputes or payment defaults.

When does a Mortgage end?

A mortgage usually ends when the underlying loan has been repaid in full. This means that once the borrower has settled all debts according to the agreed terms, the mortgage automatically expires. In many jurisdictions, the deletion of the mortgage is registered in the land register to officially cancel the lender's lien and make the property free of mortgage encumbrances.

However, there are other circumstances in which a mortgage can end:

Early repayment: The borrower can repay the mortgage early by paying off the outstanding loan amount plus interest. In this case, the mortgage ends as soon as the repayment has been made.
Sale or transfer of the property: If the property is sold or otherwise transferred, the mortgage can be settled with the proceeds of the sale, thereby extinguishing it.
Agreement between the parties: In some cases, the lender and borrower may reach an agreement to cancel the mortgage early, for example, if the borrower provides alternative security or the terms of the loan are renegotiated.

It is important to note that the deletion of a mortgage from the land register is a formal legal act and must be carried out in accordance with the applicable laws and procedures to ensure that the property is free of mortgage encumbrances.

How can you cancel a Mortgage?

A mortgage can be deleted in various ways:

Repayment of the loan: The most common method of deleting a mortgage is to repay the underlying loan in full. Once the borrower has paid off all debts according to the agreed terms, the mortgage is automatically canceled.
Cancellation declaration: Once the loan has been repaid in full, the lender can issue a cancellation declaration stating that the mortgage has been canceled. This declaration is submitted to the relevant land registry office to arrange for the mortgage to be deleted from the land register.
Sale or transfer of the property: If the property is sold or otherwise transferred, the mortgage can be settled with the proceeds from the sale. In this case, the deletion of the mortgage is often handled as part of the closing process.
Mortgage release: In some cases, the lender may issue a mortgage release if the borrower provides alternative security or other arrangements are made. This terminates the pledge on the property and allows the mortgage to be deleted from the land register.

The exact procedures for canceling a mortgage may vary depending on the legal system and local regulations. In most cases, it is advisable to consult a lawyer or real estate law professional to ensure that all the necessary steps are taken properly.

Brief answers to the most important Questions about Mortgage

What is the difference between a Mortgage and a Land Charge?

The main difference between a mortgage and a land charge is that a mortgage is specifically tied to a particular loan, whereas a land charge is not tied to a specific loan but secures the creditor's claims in general. A mortgage is deleted when the corresponding loan is repaid, whereas a land charge can remain in place even after a loan has been repaid and can be used for further loans.

What does it mean to take out a Mortgage on a house?

Taking out a mortgage on a house means obtaining a loan from a lender, with the house serving as security for the loan. The borrower undertakes to repay the loan in accordance with the agreed terms. In the event of default, the lender can foreclose on the house to settle the outstanding debt.

When can you take out a Mortgage on your home?

A home mortgage can be taken out if you need a loan and are willing to offer your home as collateral. This can be done to purchase a new home, consolidate existing debt, make renovations or cover other financial needs. It is important to note that the ability to take out a mortgage depends on various factors such as income, credit score and equity in the home.

How can you take out a Mortgage on a house?

To take out a mortgage on a house, you normally have to follow these steps:

Financial preparation: Check your credit score and make sure you have sufficient income and equity to qualify for the mortgage.
Select mortgage lender: Compare offers from different mortgage lenders and choose the one that offers the best terms.
Make an application: Complete the selected lender's mortgage application and submit all required documentation, including proof of income, bank statements and home information.
Appraisal and approval: The lender will conduct an appraisal of the home to determine its value and review your financial situation to approve the mortgage.
Closing: Once the mortgage is approved, the contract documents are signed and the mortgage is registered. You will receive the loan and start making repayments according to the agreed terms.

It's important to carefully review the terms of the mortgage and make sure you can easily make the monthly payments to avoid foreclosure.

Can the state take out a Mortgage on my house?

Yes, in certain circumstances the government can take out a mortgage on your home. This usually happens if you fail to pay taxes or other government debts. In this case, the government can foreclose and put a mortgage on your home to pay off the outstanding debt.