What is a Mortgage Holder

mortgage

The mortgage represents a security interest in property and real estate purchases. In practice, it has largely been replaced by the land charge.In the case of mortgages, the lender secures a lien in connection with a construction or real estate loan. If the borrower is unable to repay the loan, the lender has an easily realizable right to the property or the building. For banks, the mortgage serves as security, which benefits both parties.

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  1. Mortgage: a brief definition
  2. How liens work
  3. Differences Between Mortgages And Land Charge
  4. Discount on mortgages
  5. Example of a mortgage transfer

Mortgage: a short definition

The mortgage denotes a Lien on a piece of land or property that is appointed to secure a claim. It is usually transferred from the debtor to the creditor as security when the loan is granted. The legal regulations on mortgages can be found in the German Civil Code in Sections 1113 to 1190 BGB.

Section 1115 BGB stipulates that the mortgage transfer must be entered in the land register. The creditor, the monetary amount of the claim and the interest rate as well as other ancillary services must be specified. After registration, a mortgage letter is issued, which is handed over to the creditor. The mortgage expires as soon as the debtor has paid the creditor's claims in full.

How liens work

Lenders want some security with large loans such as home loans. The access right to the respective object guarantees this security. In the event of insolvency, the lender can exploit the reason for the loan; he can also realistically estimate its value beforehand. At the same time, this mechanism is an advantage for borrowers, provided they can service the installments. Because of this security, they can show a better credit rating and therefore receive better conditions or a loan at all.

Differences Between Mortgages And Land Charge

For a long time, the mortgage was the most important lien, recorded in the civil code. In the meantime, however, the land charge has replaced mortgages. Like mortgages, the land charge requires an entry in the land register, but there is one major difference:

Mortgages relate solely to a loan. If the remaining debt decreases, the amount of the mortgage also decreases. When paying off the loan amount, it is automatically deleted.

A Land charge however, is not tied to any specific loan amount. In theory, it always remains, even after a loan has been paid off. This sounds disadvantageous for borrowers, but it has a relevant advantage: Both parties can use a land charge flexibly as security, for example in the case of a follow-up loan. Bank and borrower do not have to agree on a new loan security, they can let the land charge continue to work.

Discount on mortgages

The repayment amount of a loan secured with a mortgage is usually much higher than the amount borrowed. Because large loan amounts are usually endowed with long terms, which are accompanied by high interest payments. When paying out loans that are secured by mortgages, a Damnum, which is also known as a discount. The discount is a deduction from the loan disbursement that is deducted by the lender when disbursing the loan. The haircut is a percentage of the loan issued and is retained as an advance payment of interest. This means that the nominal interest rate for the loan is lower.

The damnum or discount is to be shown in the balance sheet under prepaid expenses in the discount account. The discount is subject to capitalization under tax law. Commercial law allows a depreciation over the entire term of the mortgage.

Example of a mortgage transfer

The company F. takes out a loan from the bank for the construction of a production hall. As security, the company F. offers the bank a mortgage on an adjacent property with an office building. The transfer of the mortgage is entered in the land register when the loan is granted. The bank then provides F. with a loan of EUR 500,000. The disbursement of the loan comprises 95% of the loan amount, while a 5% discount is retained. The loan has a term of 10 years at an interest rate of 2.3 percent. The interest on the loan is billed every six months. After 10 years, the company F. repaid the loan in full, as agreed. This also clears the mortgage. The deletion of the mortgage is then recorded in the land register and company F. can freely dispose of the property and the office building again.

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