Land Charge: How Credit Insurance Works
Property owners may already be familiar with “Land Charge.” This is because as soon as a loan has to be taken out from the bank to finance, the institution needs a credit security in case the borrower suddenly stops paying the installments. Find out how land charge actually works, what forms there are and what it can be used for.
What actually is a land charge?
Anyone who buys a plot of land or real estate usually has to pay off their loan with the bank over many years with monthly installments. This poses a risk for the financial institution, which usually secures itself against possible payment defaults with a land charge. For this purpose, a notary arranges a land charge to the land registry office. This usually costs the borrower around 0.5 to one percent of the purchase price when buying real estate.
Like a mortgage, a land charge is a form of real estate lien. This means that it gives the lender the right to seize under certain circumstances. The terms “land charge” and “mortgage” Are often used synonymously in language use, but are different forms of credit security: The land charge is independent of the loan amount and remains in place even if the loan has already been repaid. It is not linked to a specific loan and can be flexibly reused for a new loan after repayment without having to re-enter it in the land register. Banks today prefer land charges because they offer more flexibility.
In contrast, the mortgage is directly linked to a specific loan and decreases in value as the loan is repaid. After full repayment, the mortgage expires automatically. To secure a loan again, a new mortgage would then have to be registered. Because of this lower flexibility, mortgages are used less frequently these days.
But what function does a land charge actually have? The land charge secures the Grantor, for example a bank or an insurance company, in the event of payment defaults by the debtor. This means that the creditor can directly access the property in question due to the land charge without the need for legal beforehand proceedings. Before the creditor can do this, however, he must terminate the land charge with a notice period of three to six months.
The Possibility of Immediate Enforcement is Provided by the So-Called Security purpose statement limited, also known as a “security agreement” or “security agreement.” This agreement determines the conditions under which the creditor may use the land charge for enforcement. Reasons for this may include: default of payment by the debtor of a certain amount, insolvency or the opening of insolvency proceedings. Should the creditor use the land charge even though the security agreement does not allow it, he could become liable for compensation. The security agreement is usually concluded together with the loan agreement with the bank or insurance company.
If there is finally a foreclosure auction of the property, the money raised as a result will be used to service the creditors. It is possible that several land charges are entered in the respective land register, which protect a property through several loans. The credit institution that comes first then gets its money first. Subordinated land charges are also serviced in the respective order.
Once the real estate financing has been repaid in full, the land charge can be deleted from the land register. This requires a Cancellation permit in certified form, which of Grantor granted. In addition, the consent of the owner is required, which must also be certified by a notary. In some cases, however, there are advantages to leaving the land charge and using it for a new loan, for example.
What types of primary debt are there?
In Principle, a Land Charge can take on various forms, which can also complement each other:
- Foreign land charge: This most common form runs on a credit institution that grants a loan.
- Book land charge: The book Land Charge is a form of real estate lien that is only entered in the Land Register.
- Country charge for letters: In the case of a letter land charge, in addition to the entry in the land register, a letter is formed about the land charge. With the help of the letter, it is possible to transfer the land charge further without the need to enter it in the land register.
- Owner land charge: This land charge is due to the owner of a property. Once the loan has been paid off, the land charge remains as the owner's land charge.
- Total land charge: In the case of the total land charge, a land charge is charged on several plots of land, for example in the case of land used for agriculture.
Land Charge: Not Just for Real Estate Protection
Traditionally, the land charge is mainly used to finance land or real estate. But there are also other application examples. For example when investing in a yacht. The FINEXITY Project SAY42! Is a particular novelty as a bond secured by real estate. The collateral comprises land charges on two residential properties in Berlin and Potsdam.
The total land charges amount to 515,000 EUR and therefore cover 109.57% of the financing volume, which secures the financing amount in addition to the sales success of the luxury yacht. The innovative project is described as Cryptosecurities under the eWPG Implemented so that the primary debt registration can also be implemented accordingly.
