In contrast to other countries, in Germany, when buying real estate or generally acquiring property, a single mortgage is not taken out. Instead, we must distinguish between "Land Charge" (Grundschuld) and "Mortgage" (Hypothek). Both represent encumbrances on properties but have some differences.
What is a Land Charge (Grundschuld)?
The most significant encumbrance is the "Land Charge” (Grundschuld), which is a burden on the property that is not tied to a specific loan and secures a debt or other financial obligation. This mortgage is registered in the land register and is considered an independent right, regardless of the amount owed or the obligation. In the event of default, the creditor has the option to enforce the Land Charge (Grundschuld) and secure payment by selling the property without initiating foreclosure proceedings.
Special Features of the Land Charge
A unique feature of this mortgage, which exists only in Germany and does not exist in other countries like Spain, is that it can be issued for a higher amount of money than the actual debt or obligation it secures. For example, if a property is acquired with a Land Charge of 100,000 euros and the mortgage loan is 75,000 euros, the owner is entitled to the total amount (100,000 euros). This allows for securing additional debts without altering the entry in the land register. Additionally, the ranking of this encumbrance must also be mentioned. In the land register, encumbrances are entered in a specific order, giving them priority in case of enforcement according to their position.
Differences between Types of Mortgages
As mentioned earlier, there are differences between the Land Charge (Grundschuld) and the Mortgage that should be explained:
• Nature: The Land Charge is an independent and separate real right, not directly connected to the debt or obligation, as explained previously. The Mortgage, on the other hand, is a security right directly linked to the debt. In case of default, the creditor must initiate foreclosure proceedings to sell the property and recover their money.
• Foreclosure: As expected, the enforcement process is faster and simpler with the Land Charge since only the encumbrance needs to be enforced to sell the property and settle the debts. In the case of a Mortgage, the foreclosure is required, which generally takes longer and is associated with more complications.
• Economic amount: The Land Charge can be issued for a higher amount than the actual debt, while the Mortgage is directly limited to the debt and cannot exceed it.
• Priority: In Germany, a "Mortgage" usually has a higher priority than a "Land Charge."
Applying for a Mortgage in Germany
When someone wants to apply for a mortgage to purchase a property in Germany, they typically sign a "Land Charge" with the characteristics. This type of debt has a variant called "Security Land Charge," where the monetary amount is limited to the loan amount. Both types of debt must be registered in the land register and do not require specific loan contract signing at the time of property acquisition.
In addition to these mortgages, it is possible to enter into other agreements related to financing the property acquisition, such as mortgage loan contracts or guarantee contracts. These agreements establish the interest rate, duration, and payment terms.
Support from an Advisor
As evident, property acquisition in Germany differs from other countries like Spain. Therefore, someone who wishes to buy a house in this country and is not familiar with real estate regulations should follow certain recommendations to avoid any possible inconvenients. The first and most important recommendation is to rely on experts. It is advisable to work with a real estate agent who has sufficient experience in the German market. They will not only help find the best property but also assist in price negotiations and handling various formalities related to the purchase. At this point, it is also advisable to seek legal advice before signing a contract to ensure proper protection during the transaction.
Of course, there are also common recommendations such as checking affordability, verifying that the property is free of encumbrances, meeting one's own needs (location, layout, nearby services, etc.), visiting multiple properties in the same area, etc.