Legal definitions

News from DL MoneyPark and information on the financial market and Swiss romande real estate

Author : Kristen

Real estate collateral

When granting a loan, the financial institution requires guarantees. In the case of a loan secured by real estate, the title cannot be transferred, since the borrower wants to either live in the house or rent it out.

Therefore, legislation has provided for a document that replaces the real estate: it embodies collateral and can be used to secure a loan. It should be made clear, however, that between borrower and financial institution, it is always the terms and conditions of the loan agreement and not the framework conditions of real estate collateral that prevail.

Real property collateral can have the form of a mortgage (not to be confused with a mortgage loan), a mortgage obligation, a mortgage note, or a bill of annuity. All other forms are prohibited. Among these forms, the mortgage note is the most common, while the bill of annuity is the rarest. The mortgage note is based on a fixed amount and carries a paper value, meaning that it is impossible to claim any of the rights it stands for, regardless of the title.

The Swiss Civil Code (CSS) describes three forms of real estate collateral in articles 793 to 874. However, for historical reasons, there are also cantonal provisions.

Mortgage notes

Mortgage notes are entered at the land register using the file of secured real properties (save for some exceptions provided by the law).

A registration can only be deleted after the title has been canceled or annulled by the court. The debtor who has paid off all of the debt can require the creditor to return the title in an non-annulled state. It is adviseable not to have the entry deleted from the land register because the certificate would then be cancelled and could not be used.

The mortgage note can be in nominative (registered in the holder's name) or in bearer form.

The rank of the mortgage note is not strictly related to the various ranks of the mortgage loan. The mortgage note that determines the sequence of the repayment in case of forced sale is meant here; the holder of a mortgage note of the first rank will be paid off first, then that of the second rank and so on. This security, which is delivered to the banker (through the notary after it is withdrawn from the land register), provides a guarantee of being paid in preference to the debtor's other creditors in case of a forced sale of the secured real property, for example, following a procedure to create real estate collateral or in the case of the mortgage debtor's bankruptcy.

Technically speaking, the face value of the mortgage note, that is the total amount of the security given to the bank indicated both on this note and at the land register, remains unchanged even after the total repayment of the mortgage loan.

The mortgage note "follows" the real property. For instance, if it is sold and the seller's bank is paid off through the notary, the bank can release the security, which the buyers will be able to use to secure their own bank loan. The mortgage note is most often delivered by the seller to the buyers free of charge. It should be noted that it is possible for the buyer to retain this security to provide collateral for new mortgage funding, which will enable them to reduce or eliminate the cost of creating a new security or use this note as collateral for any other purpose (for example: founding a company, guaranteeing debt recognition, etc.).

The mortgage note should always be kept in a safe place. If lost, it can only be canceled through a lond and costly judicial procedure brought before the president of the civil law court with jurisdiction over the place where the property is located. In addition, the mortgage note should never be punched for filing, which would invalidate it and a duplicate would have to be made, which would generate further costs.

Just so you know, cantonal pricing has been enforced to avoid differences in notary fees.

Digital mortgage notes

Since 1 January 2012, with the revision of the civil code and land register texts, it is possible to manage and save mortgage certificates directly online: this is called a digital mortage note. The land register has entered the digital era. This means a dematerialisation of real estate collateral with advantages that you can imagine: no more costs of transmitting documents between the land register, notary, bankers and private individuals. If clients embrace digital notes, banks will not have to physically stock legal documents in safes anymore. Another advantage: you can't lose it. Long and costly procedures for invalidating lost titles can now be avoided.

Whatever form of note you choose, paper or electronic, it is executed by a notary act. Once the mortgage loan has been totally paid off, the creditor has to check with the land register in the case of a digital note to make make sure that the entry has been transferred to their name, not the bank's name.

You have the freedom to choose between a paper and digital note. All mortgage notes created prior to 1 January 2012 can be converted into digital ones by signing a simple agreement between the bank and the property owner. However, those created after 1 January 2012 will have to be converted by a notary act with a fee.

Mortgage

A mortgage can be created to secure any type of debt, either current, future or simply potential.

The mortgage does not have paper value. It is only a document confirming that a security has been entered at the land register.

Maximum or capital mortgage

Loans secured by real estate can be used as collateral by way of a maximum or capital mortgage.

The capital mortgage is registered for a fixed amount. Real estate collateral secures the loan amount, interest accrued in the three years before the opening of bankruptcy, interest from the last date of maturity, default interest and costs of potential proceedings.

A maximum mortgage is considered an option when the debt amount cannot be determined precisely (for example, to secure a construction loan or any other current account facility). In this case, collateral covers the maximum amount. To reduce risks to a minimum, the bank generally sets this amount while considering four-year interest. Thus, the maximum mortgage generally secures an amount that is 20% to 30% higher than the credit limit or loan granted.

Mortgages almost always adopt the form of a maximum mortgage.

Bill of annuity

The bill or annuity is a debt created using the ground rent on a property. Only rural buildings, dwelling houses, and building plots can be encumbered.

Loans secured by a bill of annuity have particularly long termination periods of 6 to 15 years.

The bill of annuity has paper value. It excludes any personal liability since it is secured by the real estate alone.

Today, increasingly fewer bills of annuity are being created, although their presence at the land register is still very strong.

Mortgage priority

When several securites of different ranks are created for a real estate property, each of them is assigned a mortgage priority (order of entry).

Priority depends on the order of entry in the land register journal.

In case of realisation, the price of the real estate is allocated to creditors according to their rank.

Our advice

If you are going to hypothetically create or adapt a mortgage note, we recommend you provide for a margin depending on the face value.

For example, if you build your house and the face value of the construction loan is CHF 500,000, the financial institution will require a note of at least CHF 500,000. If, during the construction, you elect to create capital gains or a problem crops up  that requires you to raise the mortgage loan, you will also have to raise the mortgage note. To do so, you will need a notary and be subject to fees. Conversely, if you raise your certificated by 10% at the start of the construction (for example, by CHF 50,000), you will pay only the cost of raising it (approx. CHF 300). Thus, the notary fee will only have to be paid once.

We advise you to create mortgage notes to bearer because if the financial institution changes, the certificate will be transferred by assignment using registered post, unlike a nominative note, which would have to be endorsed before the notary and would require a fee.

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