Secured loan
Granting a loan always involves a greater or lesser risk for the lender. Therefore, in most cases the borrower is required to provide collateral that the lender can fall back on should the loan not be repaid. In a secured loan the collateral is a private or commercial property. The lender receives a real estate lien in the form of a mortgage or a land charge. While the legislator leaves it to the lender’s discretion whether to require collateral for all other types of credit, strict statutory provisions apply to a secured loan; these are laid down within the supervisory conditions of the Kreditwesengesetz.
Mortgage or land charge? There are differences
With a mortgage, the property owner (the mortgagor) assigns rights in their property. In return they receive a specific sum of money from the lender, i.e. the mortgage creditor. If the borrower fails to meet their payment obligations, the property is subject to foreclosure. The proceeds from the sale are then used to satisfy the creditor’s claims. The exact definition of the claims is set out in the declaration of purpose. If the property is encumbered with multiple mortgages, the priority determines the extent to which a creditor can satisfy their claims from the proceeds. Any surplus from the sale naturally belongs to the property owner.
By contrast, the land charge is initially an abstract right. It is therefore not tied to a specific loan contract. In practice, however, a land charge is usually linked to a loan within the framework of a contractual purpose agreement, just as with a mortgage. In this case it is referred to as a security land charge. The decisive difference to a mortgage is that the land charge is not dependent on the current state of the loan liability. A registered land charge can therefore also be applied to other loans simply by extending the security agreement, i.e. the declaration of purpose. For this reason, the land charge is generally preferred in practice over the mortgage.
Lending limit determines the amount of the loan
For a secured loan it is precisely defined to what extent the value of the real estate lien may be registered. This so-called lending limit thus determines up to which upper limit the granting of credit can take place. It can be determined in two ways. The lending limit is either up to 60% of the lending value or 50% of the market value. The lending value represents the value of the property that can with high probability be achieved if it were sold. It should be estimated, based on sound expertise, prudence and without compulsion, what price a potential buyer would pay a seller on a given valuation date. For the property, a stable value adjusted for price fluctuations must therefore be determined that represents a secure lower sale limit, and this must apply for the entire term of the loan, which can amount to up to 30 years in some cases.
From case law the following requirements for the lending value can be derived. It should be valid for the entire term of the loan. The determining value components should stem only from the past and the present. All factors must be documented in writing, including all existing risks. As the definitive lending limit, a maximum of 60% of this lending value is ultimately set, with the additional condition that the lending value must not be above the sale value. The market value (also called market price) is determined in the context of a market value assessment. As the name suggests, the possible sale value in the ordinary course of business plays the decisive role here. Only the general characteristics of the property are considered, without regard to any unusual or personal features. This is also where a much-discussed difference between lending value and market value can be seen. When the market value is determined on the basis of the general circumstances, this implies that sufficient time is available for sales negotiations. In an emergency, however, when a secured loan leads to foreclosure, the highest bidder is awarded the property without lengthy prior price negotiations. The legislator takes this into account by setting the lending limit on the market value at a maximum of 50%, compared to 60% of the lending value.
A secured loan is subject to strict requirements
In principle a secured loan is limited to private and commercial properties. In addition, the following conditions must be met: The real estate lien must be legally enforceable within an acceptable period. For this reason, contractual arrangements in this area are drawn up exclusively under notarial supervision. The market value or lending value may only be determined by a sworn and independent expert in the form of a written valuation report. In addition, the value retention of the property must be reviewed at regular intervals, namely every three years for residential properties and even annually for commercial properties. Furthermore, adequate building insurance must be proven.
With regard to the valuation of a residential property, the legislator grants credit institutions an alternative lending option, not least because obtaining an expert valuation from an independent appraiser can sometimes involve considerable costs. This alternative allows the credit institution to perform a valuation according to its own guidelines, provided these demonstrably meet the statutory requirements. In this case, bank-internal staff carry out the valuation, which involves significantly less effort and cost for both parties.
Secured loan splitting enables flexible loan structuring
A secured loan concerns exclusively private and commercial properties. This does not, however, mean that the loans granted must be used exclusively to finance the property. Secured loan splitting means that a secured loan can be divided into two loan parts. One part covers up to the lending limit of 60%; the other part is a personal loan that can exceed the 60% limit. In this case it is referred to as a non‑genuine secured loan split. This is no obstacle to agreeing different loan terms for both parts with respect to duration, interest and repayment. For the borrower it can be advantageous to agree a shorter term for the personal loan, because once this part is repaid they have renewed financial flexibility which they can use for a new loan thanks to the registered land charge.
In a genuine split, two separate loan agreements are concluded, one for the secured loan and one for the personal loan. In this case the borrower benefits from particularly favorable interest rates for the secured loan, because this portion, being secured within the 60% lending value, requires less own funds from the credit institution and therefore receives a more favorable risk classification. Which form of secured loan splitting is more advantageous in an individual case can only be determined in the course of competent advice.