Collateral

Collateral - Collateral refers to the provision of security in favor of a lender to minimize the lender’s default risk. In real estate financing, the most important form of collateral is the land charge, which is registered on the financed property. In addition, supplementary forms of collateral such as guarantees, life insurance policies, or home savings contracts can strengthen the collateral.

Types of Collateral in Real Estate Financing

The most common collateral instruments:

• Land charge: The standard instrument - a real right that entitles the bank to foreclose on the property in the event of default. Unlike a mortgage, the land charge is not tied to a specific claim and can be flexibly used for additional financing. The land charge is created by notarial establishment and registration in Section III of the land register.
• Mortgage: Similar to the land charge, but tied to a specific claim-the mortgage automatically expires upon repayment of the loan. It has become rare in practice, as it allows for less flexible reuse.
• Guarantee: A third party (e.g., parents, spouse) is liable for the borrower’s obligations. Directly enforceable guarantees allow the bank to take direct action without prior enforcement against the debtor.
• Assignment of life insurance policies or home savings contracts: The cash value is assigned to the bank as additional collateral-useful as supplemental security when the loan-to-value ratio is just above the 80% limit.
• Assignment of rental income as security: For rented properties, the rental claims are assigned to the bank-in the event of default, the bank receives the rent directly and does not have to wait for the lengthy foreclosure process.

Senior vs. Subordinated Collateral

The priority of land charges in the land registry determines the order of satisfaction in the event of foreclosure:

• First-priority land charge (Rank 1): Is satisfied first in a foreclosure sale-offers the bank the highest security and the borrower the best terms. Banks generally offer the lowest interest rates for first-priority land charges.
• Subordinated land charge (Rank 2 and below): Is satisfied only after the senior creditors have been satisfied - higher risk for the bank, so in practice an interest rate premium of 0.2 to 0.8 percentage points compared to first-ranking collateral is common.

In practice, banks almost always require first-lien collateral. Subordinated land charges are accepted at most by building societies or development banks such as KfW if the first-lien land charge has already been issued to another bank.

Collateral and Creditworthiness

The quality of the collateral influences not only the interest rate but also the maximum loan amount. Banks typically grant loans up to a loan-to-value ratio of 80% of the mortgage lending value against a first-ranking land charge. According to Section 16 of the German Mortgage Lending Act (PfandBG), the mortgage lending value is assessed in a sustainable and conservative manner and is often 10-20% below the current market value. Anyone who needs a higher loan amount must provide additional collateral-either through a guarantee, an assignment of life insurance proceeds, or a land charge on another unencumbered property (third-party collateral).

Land Charge Registration: Process and Costs

The creation of a land charge occurs in four steps: First, the owner instructs the notary to create the land charge; then, the notary notarizes the land charge deed; next, the notary submits the application for registration to the land registry office; and finally, the land registry office enters the land charge in Section III. The total duration is four to eight weeks, depending on the land registry office’s workload. The costs are governed by the Court and Notary Fees Act (GNotKG) and are non-negotiable-for a land charge of 300,000 euros, notary and court fees amount to approximately 1,200-1,500 euros.

Practical Tip for Property Owners in Nuremberg and Franconia

We recommend that borrowers in the Nuremberg metropolitan area not immediately have the land charge deleted after the loan has been fully repaid. A deleted land charge incurs notary and land registry fees of several hundred euros again upon re-registration (e.g., for a follow-up loan or a new loan). Instead, we recommend leaving the land charge in place and keeping a release authorization from the bank on file. This way, the land charge can be transferred to a new bank if necessary-saving costs and significantly speeding up future financing. Especially in Nuremberg, where property values in attractive locations such as Erlenstegen, St. Johannis, or Maxfeld have risen sharply in recent years, it is also worthwhile to use the existing land charge as the basis for a second mortgage and thus access the increased equity at favorable terms.

Frequently Asked Questions

What is the difference between a land charge and a mortgage?

The land charge is abstract-it exists independently of the underlying claim and does not automatically expire upon repayment of the loan. After repayment, the bank is obligated to issue a cancellation authorization, which the owner can submit to the land registry office. A mortgage is accessory-it is strictly tied to a specific debt and automatically expires upon its full repayment, though it must be formally deleted from the land registry. In practice, banks almost exclusively use land charges because they are reusable and more flexibly transferable-an important advantage for refinancing and selling loans on the capital market.

Can the bank simply auction off my house?

No, a foreclosure auction is subject to strict conditions. First, the bank must call the loan due, which typically occurs after at least three missed payments and a grace period with a threat of termination. Afterward, the bank must apply to the competent local court for a foreclosure auction. The court sets an auction date, which is publicly announced at least six weeks in advance. The entire process typically takes 12 to 24 months-enough time to seek an amicable solution, such as selling the property, entering into deferral agreements, or restructuring the debt. We recommend contacting the bank early on if you are facing potential payment difficulties.

What does it cost to register a land charge?

The costs consist of the notary fees for notarizing the land charge and the land registry fees for registration. Both fees are based on the Court and Notary Fees Act (GNotKG) and are uniformly set nationwide-they are non-negotiable. For a land charge of 200,000 euros, total costs amount to approximately 800-1,000 euros; for 300,000 euros, approximately 1,200-1,500 euros; and for 500,000 euros, approximately 1,800-2,200 euros. These costs are usually borne by the buyer or borrower and should be factored into the total closing costs.

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