Another fundamental element of the mortgage are the guarantees, among which the main one is obviously the mortgage on the building. Indeed, we can say that it is precisely the mortgage guarantee that is one of the elements that characterize the loan compared to other forms of loan or financing.
Let’s see what is meant by a mortgage guarantee
As is known, a mortgage is generally paid to allow the applicant (borrower) to purchase or renovate a property. The main guarantee that the bank requires to protect the disbursed capital is, therefore, the real estate itself: in the event that the borrower (or the person requesting and obtaining the loan) fails to comply with the commitments provided for in the loan contract (regular payment of the installment), the bank can claim its right on the same building for which the loan was requested.
The tool that allows you to create this form of guarantee is, therefore, the mortgage (generally of the first degree) that will be imposed on the property starting from the stipulation of the mortgage deed until the extinction of the debt. This type of mortgage makes the bank a privileged creditor, thus becoming the main user of the proceeds that would derive for example from the sale of the property in the event of the insolvency of the borrower.
How the mortgage on the building is born
In practice, the bank, before delivering the sum agreed in the loan agreement, must turn on the mortgage on the property. Very frequently the purchase deed of the building and the loan agreement are stipulated simultaneously and by the same notary. In this way, there is the title for the constitution of the first-degree mortgage, which must be registered in the public registers. This aspect is relevant because the information on the presence or absence of a mortgage on a property is fundamental for the effective marketability of the property.
The mortgage will also be charged for value generally higher than the amount disbursed by the bank: a typical value is 200% but sometimes it can also assume higher percentages. The reason is that the bank wants to protect itself not only for the total coverage of the amount given on loan but also from all the charges related to the cost of the money to possible judicial costs, fiscal charges, etc. that may result in the management of any debtor’s insolvency.
Effects of the mortgage on the building
The effects of the mortgage on the building can be different, we can outline the three most frequent situations:
- If the borrower is punctual in respecting the contractual commitments and remains the owner of the property for the entire duration of the loan, the mortgage generally has no practical effect for the borrower himself;
- If the borrower is no longer able to honor the debt, the mortgage will de facto act to subtract the ownership of the property in favor of the creditors (in the first instance, therefore, the bank as a privileged creditor), which will benefit for example from the proceeds from the sale of the property;
- In the case of sale of the property before the deadline for repayment of the loan (and therefore with a mortgage still on the property), the new buyer will demand the extinction of the debt and the cancellation of the mortgage before the stipulation of the new contract. It will, therefore, be the responsibility of the borrower, who in this case is also the seller of the property, to provide for the complete extinction of the loan in advance.
Cancellation of the mortgage
When the mortgage is completely extinguished, the mortgage from the public registers must be canceled, so that the property is free from this burden and can, for example, be resold again without particular difficulties.
The cancellation of the mortgage up to 2007 had to be requested by the debtor at his own expense. With the law 40/2007 (Bersani law) the mortgage expires automatically with the extinction of the mortgage without any expense for the debtor, and it is the bank’s responsibility to provide the receipt to the now ” former borrower “.
Other forms of guarantee
In addition to the typical guarantee of the loan agreement, which as we have seen is the first degree mortgage on the building, the bank can sometimes request additional guarantees, for example if the amount of the installment is high compared to the income of the applicant, or if his work has such precarious characteristics as to cause the bank to have more caution.
The additional guarantees required may be real or provided through assets, or personal, in this second case they are often provided by a third party. For example, perhaps the most widely used guarantee, the surety, provides that a third party guarantees all its assets in case of default by the borrower. It is, therefore, a very burdensome commitment that must be well evaluated by the person who decides to take it on board.
As we have said, there are no fees for canceling the mortgage in the event of repayment of the loan. Conversely, the expense of turning on the mortgage can be quite high and weigh on the borrower. It should be noted that they are generally calculated as a percentage of the value of the mortgage, which is often – as mentioned – equal to 200% of the disbursed capital.