Real estate purchase

What is a land charge?

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August 2022

If you take out a loan to buy an apartment, you will inevitably come across this term: the land charge. The lender uses it to secure his loan. Later, the land charge is also entered in the land register. Here we explain everything you need to know about it.

What is a land charge?

In order to fulfill the dream of owning a condominium, many people have to take out a loan to finance it. But in return, the financing bank demands collateral - in the case of real estate financing, this is usually a land charge. Other forms of this so-called real estate lien are the mortgage and the annuity debt. The lender uses these to secure its real estate loan. The land charge gives the bank a right of access to the property and, if applicable, the land, should the monthly loan installments not be paid. We explain below what this means for you as a potential buyer and what first-time buyers in particular should look out for.

Before you sign the loan agreement with your bank, you should know the legal framework. If you enter into a land charge, the creditor can, under certain conditions, realize its lien on the property. In concrete terms, this means that in the worst case, your bank, as the creditor, can initiate a foreclosure sale of your property if you do not pay your installments. The land charge effectively makes the lender the owner of the property. This means that the lender has the right to sell the property. But for this to happen, you usually have to have failed to pay at least three consecutive loan installments. In most cases, a first-ranking land charge amounts to 60 to 80 percent of the market value of a property.

If another bank is already listed in the land register, the registered bank usually assigns the land charge to the new bank. However, the amount of the registered land charge does not indicate how much the previous owner still owes. The land charge usually remains in the land register in its full amount until the loan has been paid off in full. Which land charge is registered for the new bank and what collateral it otherwise requires is agreed between the bank and the customer in the loan agreement. The purchase agreement states which land charges are already in the land register and whether they are to be deleted or taken over. If this procedure overwhelms you even as you read it, don't worry: a notary is always present during the entire sales process, draws up the purchase agreement and notarizes it. It is also his job to clarify all important questions with the bank. At the notarization meeting, he reads the contract aloud once again and final questions can be clarified and requests for changes can be made.

Bear in mind that the land charge also bears interest. This land charge interest is recorded in the land register and is usually significantly higher than the loan interest rate, at around 15 percent. The interest rate is set so high because the bank wants to protect itself against future costs. Although the land charge interest increases the land charge, you do not actually have to pay it: In most cases, the amount exists only on paper. But what is it for then? In the event of a forced sale, the bank can demand an amount from the auction proceeds that is higher than the amount of the land charge. Land charge interest is subject to a three-year statute of limitations, so it cannot increase indefinitely.

Registration in the land register

The order of entries in the land register is important: In the event of foreclosure, the rights of the bank that is higher up in the order of entries always take precedence. In the event of foreclosure, the bank can therefore expect to get its money back sooner. A bank therefore checks carefully whether land charges have already been registered before granting a real estate loan. Banks also usually insist that they will not pay out the construction loan until the land charge has been registered. If there is not enough time between the purchase agreement and payment, the notary can confirm that the land charge can be registered at the intended rank.

How buyers can secure themselves

Although you must grant the bank some security with the land charge, you can also secure yourself. For example, you can draw up a so-called security agreement. This declaration of purpose is intended to ensure that the bank as creditor does not assert more rights in the form of the land charge than it is actually entitled to. In the security agreement, you can agree that the bank or other creditors may only use the land charge in the course of the intended security purpose - the real estate loan granted. Do not forget the most important part of the security agreement: that the bank may no longer assert its rights if the secured claim should no longer exist.

You can request that the land charge be deleted from the land register as soon as you have repaid your construction loan. However, you must apply to your bank for this. If you do nothing, the land charge remains in the land register for the time being. The lender may not charge any bank fees for the deletion - this is a secondary obligation for him. However, you can deliberately leave the land charge in place and take out a follow-up loan with the bank. Alternatively, there is also the option of rescheduling the debt: If you take out a new real estate loan with another financial institution, the debt is cancelled in favor of the old bank and registered in favor of the new one. If you decide to cancel the debt and your bank agrees, it will send you a cancellation authorization. You can then apply to the land registry for cancellation of the land charge via a notary.

Other forms of mortgage

In addition to the land charge, there are two other types of land charge: the mortgage and the annuity charge. The mortgage differs from the land charge in that it is what is known as accessory security. This means that the mortgage only exists until the corresponding loan - i.e. the security value - has been repaid. The annuity debt can be regarded as a kind of subform of the land charge. If an annuity debt is registered, capital flows out of the land or property to a certain person at regular intervals - in other words, a kind of annuity is paid out. If you are interested, please feel free to contact us - as a reliable and experienced partner, we at ACCENTRO will assist you throughout the entire purchase process and find the property that best suits your needs.

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