Land charge / mortgage - What financing risk exists?

Hello everyone,

my question concerns risk management in real estate financing.

I have looked into the differences between a land charge [Grundschuld] and a mortgage [Hypothek], but I still haven't fully understood it. Although the legislator made legal changes regarding the sale of loans a few years ago, I still have a somewhat uneasy feeling when I think about it.

A few words about our personal starting situation: We intend to conclude a long-term loan agreement (25-30 years) with relatively low repayments, although we could also afford a shorter term. One reason is the speculation on rising interest rates and the expectation that we will achieve higher long-term returns in the capital market than we pay for the loan.

Assuming our plan works out, it may well be that the bank will try by all means, for example after 20 years, to get rid of the loan agreement because it is uneconomic. The options (foreclosure or auction) available to the lender with a land charge [Grundschuld] are dreadful. With the appropriate calculation (dishonesty) by the bank, as I understand it, the loan agreement can be terminated for the slightest reasons.

Examples:
- The property value deteriorates due to a natural event, and the bank doubts the loan security
- A stroke of fate (illness, unemployment, etc.) raises doubts about the borrower's creditworthiness
- The bank is insolvent and urgently needs liquid funds
- A payment is a few days late due to a mistakenly poorly planned account transaction
- Etc.

Now I wonder how I can protect us against such cases.
- Are there insurance policies that cover such cases?
- Does anyone know providers who accept a mortgage [Hypothek] instead of a land charge [Grundschuld]? Allegedly, real estate financing is exclusively handled via a land charge [Grundschuld] (but I can hardly believe that)
- What are my rights (it seems to me that tenants have more rights...)?

What do you think or how do you assess the risk? Of course, one could say "they won't do that if you pay properly." But I assume bankers are potentially very bad people. You can only rely—if at all—on the law (as long as it is not changed).

Many thanks in advance for your opinions!

I assume bankers are probably very bad people.
Thank you very much in advance for your opinions!

In my opinion, you should first reconsider your opinion about this! Why should they be bad people?

Our advisor was so great that we are now personally friends with her. I can't understand why anyone would want to start a mortgage with such an attitude o_O

I phrased that a bit awkwardly, don't misunderstand. I do not mean the personalities of the employees, but rather the potentially purely profit-driven interests of the financial institutions in this regard.

Of course, the local bank around the corner is honest, nice, and trustworthy, no question. But what about the anonymous online banks that sell your loan contract, brokered through a broker, to some financial sharks/vultures from overseas?

One more thing about the

I can't understand why anyone would want to start a construction loan with such an attitude o_O

I believe that a healthy distrust and sober weighing of the risks of a contract are much more appropriate than naive trust in the smile of the friendly bank advisor. It would be bad if construction loans were only reserved for naive people...

I once looked into the differences between a land charge (Grundschuld) and a mortgage, but I still haven’t fully grasped it. The legislator did pass legal changes regarding the sale of loans a few years ago, yet I still have a somewhat uneasy feeling when I think about it.

You don’t need to have that uneasy feeling.

The possibilities (foreclosure or auction) for the lender with a land charge are truly frightening. With the appropriate calculation (dishonesty) by the bank—as I understand it—the loan agreement can be terminated on the lowest grounds.

Examples:
- Property value deteriorates due to a natural event and the bank doubts the loan security
- A misfortune (illness, unemployment, etc.) causes doubts about the borrower's creditworthiness
- The bank is insolvent and urgently needs liquid funds
- Because of a accidentally poorly planned account movement, a payment is made a few days late
- Etc..

Without a reasonable cause, the bank can’t do anything at all; courts will stop them faster than the termination reaches you ;) Regarding your examples 1 + 2: Good examples that justify a legitimate loan termination. However, if you can renovate the property again (and you do because the insurance pays) or despite misfortune you can still pay your installments, the bank won’t get away with anything. Examples 3 + 4 are unrealistic; an insolvent bank will be managed by the insolvency administrator (or a bank protection scheme). That bank ceases to exist, only employees or people working at a bank remain.

Now I wonder how we can protect ourselves against such cases.
- Are there insurances that cover such cases?
- Does anyone know providers that accept a mortgage instead of a land charge? Allegedly real estate financing is exclusively handled via a land charge (which I can hardly believe)
- What are my rights (it seems to me tenants have more rights...) ?

Insurance against what? Bad people? Get legal protection insurance. A mortgage instead of a land charge will be illusory; mortgages have died out in financing for understandable reasons. Rights? You have plenty, far more than the bank. For example, you can terminate after 10 years—who protects the bank from that, when it is not allowed?

What do you think or how do you assess the risk? Of course, you can say “they don’t do that if you pay properly.” But I assume bankers are possibly the worst people. You can only rely—if at all—on the law (as long as it isn’t changed).

The risk doesn’t matter at all, you simply have no alternative ;). Many TV shows always portray THE BANK as the one who evicted the poor debtor from their cozy home—in a side note it might then be mentioned that the debtor is now unemployed and can no longer pay their installments :(. The poor guy... and the evil bank. So yes, if you fulfill your obligations, nothing will actually happen to you.

By the way, this is written to you by an evil (real estate) banker ;)

One more thing about

I believe that a healthy mistrust and sober consideration of the risks of a contract are much more appropriate than naive trust in the smile of the friendly bank advisor. It would be terrible if construction financing were only reserved for naive people...

No one is saying that. But I do go into a negotiation with what it ultimately is, with the necessary respect for the person. After all, you want something from the bank, right? And yes, neither I nor the bank has anything to give away. Either we come to an agreement or we leave it at that ;)