What Exactly Is A Mortgage?

If this term does not refer to the loan itself: what is a mortgage? This term comes from the Greek word hypothéke and designates a pledge. This means that the person obtaining a loan to build or buy receives the requested sum only by depositing a pledge as collateral . The creditor can be a credit institution or an insurance company. These creditors, in the event of non-payment, have the right to proceed with a pursuit operation for the realization of the pledge, the pledge right may be the subject of enforcement measures.

Normally, the mortgage certificate acts as a pledge. It is a security paper attesting to the right of pledge. Mortgage in the proper sense of the word is hardly used these days. The explanation is simple: it only has a guarantee function without being incorporated into a security paper, which is itself intended for trade. The mortgage certificate exists in two forms: the traditional paper mortgage certificate with the obligation to keep the document and the register mortgage certificate , registered in the land register. For the latter, there is no actual security paper.

How does a mortgage work?

To obtain a mortgage from a bank, the customer must meet two criteria: advance rate and debt ratio . The advance rate is the ratio of the mortgage amount to the market value of the property, which must not exceed 80 percent. Therefore, 20 percent of the market value of the property must come from equity, knowing that it is not only about fortune in cash, advances of inheritance or family or friends loans. Because the capital of the second and third pillar can also be withdrawn for this purpose or be pledged. The second criterion to which the borrower must meet: a debt ratio which must not exceed 33 percent. This is the ratio of the annual cost of the property to the annual gross income of the client (s). The annual cost of the property consists of: mortgage interest, depreciation and maintenance.

If the potential client meets these two criteria, it is finally possible to define more precisely the amount of the mortgage loan : the sum which, in addition to the equity of the client (s), will be necessary to be able to finance the property in question. Broadly speaking, there are three forms of mortgages that can contribute to the financing of real estate, namely the fixed rate mortgage, the LIBOR mortgage and the variable rate mortgage , the latter two evolving in depending on the evolution of interest rates .

All three have specific advantages and disadvantages. It is only after having made a detailed analysis of his personal situation that one should begin to compare several offers for the same scenario, by focusing on banks as well as insurance. But the compatibility of these offers with the borrower’s personal situation and their quality are difficult to assess without having a global perspective of the market.