General information on land-charge loans

Taking out a land-charge loan is one of the most common ways to finance a property you want to buy or build, or to mortgage an existing property if you need capital. The land-charge loan takes its name from the so-called land charge (Grundschuld), which is used as security for the associated loan. As a so-called real property lien (Grundpfandrecht), the land charge, like the mortgage, is regulated in the law of property in the Bürgerliches Gesetzbuch (BGB) in §§ 1191 et seq. According to the Civil Code, a land charge is the real right to demand payment of an agreed sum from a plot of land or land-like rights, such as condominium ownership or a hereditary building right. In a land-charge loan, a property is encumbered with a land charge so that that property is liable for repayment of the loan amount. To secure the land-charge loan, the land charge as a real right is entered in Section III of the land register. This entry requires a notary for notarization. Real property liens such as the land charge or the mortgage are intended to ensure that loans are secured for the lender. If the granted land-charge loan is not repaid by the borrower in accordance with the agreement, the lender can sell the pledged property and use the proceeds of the sale to repay the land-charge loan. The land charge grants the creditor — usually the bank — the right, after termination of the land charge, to carry out enforcement proceedings against the debtor and to realize the encumbered property through public foreclosure auction or compulsory administration.

Uses of land-charge loans

For construction financing, the interest rate to be paid on a land-charge loan is significantly lower than, for example, on consumer loans. Because the bank as lender receives particularly substantial real collateral in the form of the property as security, it only bears low loss risks and can therefore calculate a correspondingly favorable interest rate. A property owner who mortgages an existing property with a land-charge loan can therefore obtain credit much more cheaply than without using a house or plot of land as collateral. A land-charge loan also offers the borrower the additional advantage of long terms. Repayments and interest-fixations are spread over a long period, which keeps the repayment installments comparatively low. The combination of low interest rates and long-term repayment schedules makes the ongoing burden from a land-charge loan particularly favorable and liquidity-preserving.

Differences between land charge and mortgage

Land charges and mortgages are the two real property liens recognized by the BGB. They are relatively similar, since both serve to pledge a property as security for mortgage financing. The legislator has designed the land charge as a variant of a mortgage, and accordingly statutory regulations for real property liens are found in the law of property in the BGB. If a loan is secured by a land charge, all loan debts to the lender must be repaid before the lender is obliged to release the pledged property.

If a loan is secured by a mortgage, each repayment made on the mortgage reduces the value of the mortgage claims that the lender can assert. Most lenders and borrowers prefer land-charge loans to mortgage-secured loans because land-charge loans are more flexible. In practice a land charge is almost exclusively used to secure a variety of claims, which is why it is also referred to as a security land charge (Sicherungsgrundschuld). This practicality makes land-charge loans more suitable in practice than mortgage-secured loans. If the collateral for a loan exists in the form of a land charge, its amount may be higher than the value of the pledged property. This is different with a mortgage, where the value of the mortgage claim must not exceed the value of the property. Under statutory provisions, mortgage loans are subject to a maximum limit of 80 percent of the property's value. No such upper limit exists for a land charge.

Out of understandable interest, banks will, however, only grant a loan amount that exceeds the property's value in very exceptional cases. Conceivable would be cases in which the lending institution can be offered other securities. In any case, banks try to keep the risk in the event of default as low as possible.

Loan amount, interest and repayment for land-charge loans

The possible amount and the terms of a land-charge loan depend on the actual market value of the property in question. To determine this value, an expert is often appointed to provide a precise valuation — often a sworn expert — who determines the property's value objectively. Not only the location, features and size of the property are relevant. Third-party rights already entered in the land register also play an important role in the valuation. An unencumbered property that is only lightly burdened by easements therefore represents considerable asset value that can be used as security for a favorable land-charge loan. The loan amount is also referred to as the nominal amount of the land charge (Grundschuldnominalbetrag), which as a rule does not exceed the value of the property used as collateral. However, for example due to default in payment, an increase in the amount owed may occur so that the total debt from a land-charge loan can exceed the value of the property collateral. For this reason, usually not only the land charge amount but also the land charge interest and ancillary claims are entered in the land register. How high the interest rate for a land-charge loan is depends on the value of the property, the amount of the loan and the current interest rate level. If the loan sum from a land-charge loan is under 60 percent of the current market value of a property, a particularly favorable interest rate can be expected. Real property liens can be registered as senior or subordinate entries in the land register. In the case of a foreclosure auction, the creditors' claims are satisfied according to their rank in the land register. Therefore a first-ranking land charge to secure a land-charge loan is particularly safe for the lender and accordingly the loan conditions are more favorable compared to subordinate land charges used to secure loans. Additional securities can further reduce the interest rate for a land-charge loan. If the owner has consented to immediate enforcement, the lender can, after termination of a land-charge loan, enforce and realize the property without further court proceedings. In addition to the land charge and consent to immediate enforcement, the borrower's assumption of personal liability gives the lending institution further security and risk reduction for possible improvements in terms. Land-charge loans can be repaid in different ways. Repayment can be made in regular monthly installments. If a life insurance policy or a maturing building-savings sum is used to repay a land-charge loan, often a single repayment installment is agreed at the end of the loan term.

Land charge registration & deletion for land-charge loans

If lender and borrower have agreed on a land-charge loan, the borrower must consent to the encumbrance of their property to secure the land-charge loan. This is known as land charge registration. The land charge registration also includes the application for the land charge to be entered in the land register. Its approval must be publicly certified by the owner of the property and borrower at the competent district court or be notarized by a notary so that it can be effectively submitted to the land registry. After the land-charge loan has been repaid and all claims secured by the land charge have been settled, the borrower acquires a so-called reclamation claim (Rückgewähranspruch), which primarily includes a claim for deletion of the land charge from the land register and thus the release of the collateral. In practice, the lender issues a deletion consent for the registered land charge. The notarized deletion consent can then be submitted by the property owner to the land registry to apply for deletion of the land charge from the land register.