Within the real estate sector, it is common for loans to the developer to be secured by the delivery of a mortgage guarantee. This guarantee is taken in the presence of a notary and registered in the land register.
Firstly, during the project, the owner of the property cannot transfer or re-mortgage it. If it is re-mortgaged, the next mortgage will be of the second or third degree, with priority always being given to those of a lower degree.
Second, if the developer is unable to repay the loan at maturity, it is always possible to foreclose on the collateral, sell the property provided as collateral at auction and use the proceeds to repay the original debt.
As is normal, in the process of executing the collateral by auction, it may lose part of its value and when it comes to repaying the debt it is not sufficient. For this reason, real estate with an appraised value of 30% or higher than the loan granted is always requested as collateral. The Loan to Value (LTV) is the ratio that shows the relationship between the loan granted and the valuation of the collateral expressed as the quotient of both concepts. Thus, for a loan of €300,000 supported by a guarantee of €750,000, we are talking about an LTV of 40%. The higher this ratio is, the worse the ratio is, because it implies that the loan is closer to the value of the collateral.
In Housers since summer 2020, we offer our investors investment opportunities based on fixed-rate loans with mortgage guarantees. To avoid inconvenience to our investors and to make the process easier, it is a Guarantee Agent who takes the guarantee from the developer before a notary on behalf of the investors. This Guarantee Agent is responsible for the safekeeping of the guarantee, returning it to the developer upon cancellation of the developer’s debt to the investors or enforcing the guarantee if necessary. The Guarantee Agent is an external and independent company to Housers and will always be a company with a great track record and reputable experience in this type of operations. The Guarantee Agent, concerning these loans, can never act unless it receives the mandate from the investors, therefore the guarantee is secure.
Are these projects with a mortgage guarantee more secure for the investor than those without a mortgage guarantee? From a real estate point of view and the point of view of the success of the project development, no, as the development of a real estate development does not depend on the guarantee provided. From the point of view of recovering the investment made, yes, they are safer, as it is always possible to execute this mortgage guarantee and recover the investment.
Degrees of Mortgage Guarantee:
It is possible to provide the same property as collateral several times. Each security taker is assigned to a different degree: thus, the first security taker is of the first degree, the second of the second degree and so on. In case of foreclosure and auction of the property, the first degree is the first to receive its share, then the second degree and so on. In Housers projects the mortgage guarantees will always be of the first degree and only in very specific projects, such as when new investors co-finance an opportunity with a reference fund that leads the operation, we will offer second-degree mortgage guarantees detailing it in the project file. In these cases, the LTVs will include the total debt (not just the opportunity debt) and will have to cover both debts sufficiently and marginally. Of course, in these cases, the subordination of this guarantee will be fully explained.
The execution times of guarantees can vary greatly from country to country or city to city but typically take between 12 and 24 months to execute as a benchmark.
No extra costs:
It is important to note that these projects with mortgage guarantees do not entail any extra costs for the investor, as all the costs related to the first rank mortgage guarantee are borne by the developer, who even deposits a deposit that can be used to execute the guarantee.