Use of real estate as loan collateral

In order to encumber an immovable with a mortgage, it is required to have a notarised agreement between the entitled person and the other party (real right contract) and to make a respective entry in the land register. A pre-requisite for making an entry in the land register is the payment of the state fee. The respective real right contract is concluded at the notary, usually in the same contract as the respective sale and purchase transaction, which is financed by the bank and which is why collateral is needed.

With the mortgage, a claim within the mortgage amount is ensured, interest (incl. fines for delay) for up to three years before selling the immovable in enforcement proceedings, also the costs of debt recovery, including the costs of enforcement proceedings and bailiff fees and insurance payments paid for the immovable by the mortgage holder on behalf of the owner.

If the claims ensured by the mortgage are not fulfilled (loan is not duly returned), the mortgage holder does not have to turn to the court to recover the loan and sell the property encumbered by mortgage, but the contract can immediately be submitted to a bailiff for carrying out a compulsory auction on the basis of the agreement being subject to enforcement included in this contract. In this case, the collateral provider will be transferred the claim against the borrower that belonged to the mortgage holder.

The owner of the immovable encumbered with the mortgage is entitled to possess the encumbered immovable, use it and dispose of it in the case that this does not decrease the value of the encumbered immovable nor harm the rights of the mortgage holder in any other way. This means that the owner can rent out the real estate according to market conditions and it is also possible to sell the real estate if they wish. In this case, the representative of the bank joins the sales transactions, lifts the mortgage on the real estate, and if the value of the principal collateral of the loan contract is still not sufficient in order to ensure the loan on its own, then a part of the sale price has to be paid to the bank to ensure repaymentof the loan.

For you, a mortgage means that if the loan is not repaid, the bank will be entitled to sell the apartment or house (including the land) owned by you.

Before you consent to the establishment of a mortgage

• consider carefully whether you are prepared to risk and give up an apartment or house owned by you if there are any problems with repayment of the loan;
• decide whose and what obligations you are prepared to guarantee;
• you are entitled to request, from both the notary and the bank, drafts of the contracts to be concluded and, once you have received them, review their content carefully;
• do not be afraid to contact the bank or the notary’s office to find answers to any questions that have arisen.

Use legal assistance, if needed.

When you are about to sign a notarised contract

• listen to the notary’s explanations very carefully;
• do not be afraid to ask if something remains unclear;
• double-check that the contract states specifically what you have agreed upon with both the borrower and the bank.

Additionally

• always communicate any changes in your contact details (address, phone number and e-mail address). Only in this way can you be certain that the necessary information will reach you;
• carefully review any notices sent by the bank and make sure to collect any registered letters.

If the borrower is not performing their obligations, the bank will contact you and provide you with an opportunity to perform the obligation. By performing the borrower’s obligation, you can prevent the sale of the pledged apartment or house as well as avoid incurring any additional costs or litigation.

You are entitled to require the borrower to indemnify any amounts you have paid on their behalf.