Whenever banks, savings banks, and insurance companies grant a real estate loan, they demand collateral from the borrower if they can no longer pay their installments. These are assets (monetary or material assets) that are not included in the financing. They serve as compensation for the lender in the event of payment defaults.
Since real estate and construction loans are large sums, these financings are usually not granted without appropriate collateral. However, there are various options for making this available.
The mortgage and the mortgage
Land charges represent the classic collateral for mortgage lending. This is a mortgage that gives the lender the right to pledge property if the borrower no longer pays off his debts. A corresponding note is made in the land register for this purpose. As soon as the loan has been repaid, the land charge can be deleted from the land register.
An alternative to this is the mortgage. This differs from the mortgage in that the mortgage is tied to a specific loan. The land charge entered in the land register, on the other hand, can be reused. If a loan has already been paid off and new financing is taken up, the existing mortgage can be used for this. In this way, the property owners save on notary costs again.
The surety
With a guarantee, a third person, usually from close family or friends, steps in if the borrower can no longer pay. So she vouches for him. There are different types of guarantees.
For example, the default guarantee, where the guarantor is only prosecuted when all the borrower’s financial resources have been exhausted. But there is also the directly enforceable guarantee, where the person providing the guarantee can be prosecuted immediately. A guarantee must therefore be clearly discussed, properly defined, and contractually defined.
Life insurance
Life insurance can also be used as security for mortgage lending. The contract usually runs parallel to the loan. It consists of a death benefit, if required, which protects the loan if the main breadwinner or both borrowers die. Also from a savings amount. This sum is used when paying out to reduce the remaining debt.
In the past, there was another form of securing loans utilizing life insurance. The real estate owners only pay the building interest and no repayment to the bank. The repayment portion, on the other hand, flowed into a life insurance policy. After a certain term, the full amount of the loan became due (final loan). This was paid for with the money from the life insurance. Today, this variant of construction financing is less common, as insurers hardly offer any returns on their policies. Nevertheless, this repayment replacement payment is still possible.
Bank collateral requirements
A bank does not always accept the existing security. The following criteria are important for lenders:
- Low depreciation: The collateral should not lose value or only a small amount during the term.
- Easy to assess: The value is easy for the bank to determine.
- Marketability: The security can be easily sold to creditors if necessary.
- Regardless of the economic situation: The security has no influence on the financial situation of the borrower.
Note: If the loan security loses value during the term, the bank may require additional security to be provided. This also applies if the loan is to be increased.
This is how collateral influences construction financing
The construction financing consists of various components. This includes the collateral. They affect the loan in that they affect the terms. Because borrowers with high collateral, such as a property that has already been paid off, usually receive offers with better interest rates.
Collateral such as a debt-free property does not affect the solvency of the borrower. Because even if it has a high value, the borrower cannot take money from his security. However, loan collateral makes it easier to get a loan commitment because it has a positive effect on the credit rating.
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Collateral plays a crucial role in mortgage lending because it has a significant impact on the conditions. With the appropriate loan collateral, it is, therefore, easier to find a low-interest offer for the dream of owning a home. Our financing experts will be happy to support you. Together we will find the right offer for your property from over 450 partner banks.
