Loan and property guarantee – yes or no?

Chapters of the article

• What is a pledge
• What type of property can be pledged
• When it’s okay to pledge real estate and when to avoid it
• What to look out for before you mortgage a property

What is a pledge

When you decide to borrow money, you become the borrower and whoever lent you the money (usually a bank) becomes the lender. At the same time, the lender may want to ‘insure’ that you will actually repay the debt. And at the same time to make sure that even if you do not repay, you will not suffer so much damage. That is why collateral exists. In the case of a traditional bank loan, this is usually a pledge or guarantee of real estate. So you borrow the money and pledge the property you own, which you will lose in the event of your inability to repay.

In reality, however, the loss of the property is a last resort and the inability to repay is primarily resolved by means of an agreement with the lender. However, if this does happen, the collateral is usually sold at public auction to compensate the lender.

In order to create a pledge, a contract must be drawn up which clearly states what is the subject of the pledge, the amount of the debt and how much of the pledge is secured. In addition, the obligation on which the debt and the pledge are based must also be described in detail. Subsequently, the pledge must be registered in the Land Registry and only then does it become officially valid.

The pledge is most often extinguished by repayment of the amount due. Usually, the debtor receives a confirmation from the creditor that the pledge has been extinguished and the pledge is subsequently deleted at the cadastral office. However, the pledge can also be extinguished by transferring the pledge to another property or by taking over a loan.

What type of property can be pledged

If you need to borrow a larger sum of money, you can usually avoid pledging real estate. At the same time, however, it is not possible to guarantee any type of real estate. The most common way to guarantee a mortgage is with real estate. There it is simple, as you are guaranteeing the property you are taking out the loan on. However, you can also guarantee another property owned by you, or even owned by someone else with their consent.

However, such property must meet certain requirements. First of all, the property must be for residential use. Therefore, a house or flat intended purely for business purposes cannot usually be used as collateral. Land can also be mortgaged. In this case, however, it must be land intended for building.

Some banks will also accept holiday homes as collateral. However, these must usually be suitable for year-round use. They must have an assigned description number, a driveway leading to them, and heating, electricity, water and other essential needs for year-round occupancy.

These properties must also be in good condition, both physically and legally. From the physical or technical point of view, it depends on the state of the house’s structure, when the last renovation took place, etc. The purchase price may differ considerably from the real value. The value of the property is estimated by the bank’s contractual appraisers and it should be taken into account that the value of the property as determined by the bank is likely to be lower than the purchase price.

From a legal point of view, this includes in particular liens and easements. In the case of liens, the solution is to transfer the pledge to the bank or to pledge only part of the property. However, a more complicated situation may arise if the property is encumbered by an easement.

Classic easements such as road or utility access easements are not an obstacle. But it is worse, for example, in the case of a right to use the property for life. Such a property loses a large part of its value due to the easement and the pledge may not be worthwhile for banks. Whether you can guarantee a property with an easement depends on the type of easement and the bank’s decision.

When is real estate liability OK and when to avoid it

As we have already mentioned, with a mortgage, pledging the property is standard and unavoidable. So if you’re planning to take out a mortgage from a traditional bank, you don’t need to worry. The bank will only lend you as much as they think you will be able to repay. Moreover, such a loan has clearly defined rules, clearly defined interest rates and no hidden fees. Also, in the event that you can’t repay the mortgage, it is usually possible to reach a reasonable agreement with the bank.

There are no major risks with other types of bank loans secured by real estate. The most typical in this case is the American mortgage. With this type of loan, you guarantee the property as with a conventional mortgage, but you do not have to prove for what purpose you are borrowing the money. At the same time, however, you must take into account that you will not get as favourable conditions as with a conventional mortgage.

On the other hand, you should be more vigilant when it comes to non-bank loans with a mortgage on the property. Non-bank loans have the advantage that almost everyone can get them , including people with debts or low incomes. But on the other hand, non-banks are less regulated, so you lose the consumer protections you have with traditional banks. In addition, there can be scammers among non-banking companies and you could lose your property if you are careless.

Similarly, you should avoid a payday or foreclosure loan, both with and without a property guarantee. These involve a non-banking company lending you money to pay off the foreclosure and you then subsequently repaying your debt to it. However, this is usually only a temporary solution to your debt problems, which eventually leads to mounting debt and even bigger problems. In this case, in addition to your inability to repay, you are also at risk of unfair practices by non-banking companies in the form of exorbitant interest rates, unclear terms in contracts, hidden fees or meaningless penalties.

What to look for before mortgaging a property

In all cases, detailed research and preparation is worthwhile before you decide to mortgage your property. You should therefore never skip these steps:

1. Find out the interest rate: check what interest rates you can get on the market and choose the best ones. At the same time, calculate how much you will pay per month and in total and make sure that repayment will not be a problem for you.
2. Verify the legitimacy of the lender: if you choose a non-banking company, it pays to verify it beforehand. Check their reviews and ratings and choose only those that are licensed to provide consumer credit by the CNB.
3. Study the terms and conditions: watch out for hidden fees, high interest rates and unfavourable repayment terms.
4. Go with your gut: If an offer from a non-banking company seems too good, there’s probably something unfair behind it. Similarly, if someone is pressuring you and trying to convince you of something, it doesn’t bode well. Avoid such providers.