If you are planning to take out a mortgage or you are currently paying back the loan, you probably wondered what rules govern the bank demanding that the mortgage be entered in such a different amount. Is this level dictated by the requirements resulting from the applicable provisions of law? Can you lower the amount of the mortgage that charges your property when you repay the loan? That’s why today I decided to write a few words about it.
What is the sum of the mortgage?
Under the current legal status, the mortgage secures the granted loan “up to a designated sum”, which is a specific monetary amount disclosed in the land and mortgage register. The sum of the mortgage is the maximum amount in which a creditor (eg a bank) can satisfy himself with a mortgaged property. The sum of the mortgage should be specified in the monetary units of the given currency. Currently, the amount of the mortgage can be determined in a different currency than the loan currency, which is secured by a mortgage. However, it involves some risks, I wrote about it here: Contractual mortgage as collateral for the loan.
Due to the fact that the mortgage secures the claim to the determined sum of money, it is permissible that the sum of the mortgage will be lower or higher than the granted loan. In practice, if the mortgage is the main security for the loan, the amount of the mortgage will usually be higher than the loan granted by the bank. At this point, a very important question arises, if it should be higher, on the one hand, properly securing the loan and on the other hand, it did not encumber the property excessively? The answer to this question is not a simple matter, because determining the right amount of the mortgage by the bank depends on many factors.
First of all, you must remember that the mortgage, in addition to the principal amount of the loan, should also secure claims for interest, costs of proceedings and other claims for side-offs, which were listed in the document constituting the basis for entry of the mortgage in the land and mortgage register. Therefore, when determining the amount of a mortgage, the specifics and parameters of a given loan agreement determine. This amount should be calculated so that, in addition to loan capital, it properly covers all the side-related benefits associated with it.
What does the bank take into account when determining the amount of the mortgage?
The Bank calculating the mortgage sum is based on the analysis carried out for a given loan. Then he takes into account various risks and circumstances related to the loan, in particular:
- the value and type of property on which the mortgage is to be established,
- price volatility in the real estate market,
- the currency of the loan and the method of its interest,
- the length of the loan period,
- the form of ownership of the real estate constituting the collateral,
- who is the security donor,
- the value of possible additional loan collateral,
- factors that may affect the actual level of cash recovery in the event of initiation of debt collection proceedings from immovable property.
The above factors which the bank should include in its analysis also indicate the recommendations of the Polish Financial Supervision Authority included in the so-called Recommendation S (regarding good practices in the management of credit exposures financing real estate and secured by mortgage). The recommendations arising from this recommendation refer to various issues related to granting mortgage loans, including banks’ assessment of the adequacy of loan security using the LTV ratio. This ratio determines the ratio of the loan value to the value of its collateral. Recommendation S recommends that the bank should ensure an appropriate level of collateral throughout the loan period as early as at the stage of loan granting, taking into account potential adverse changes in prices on the real estate market that may occur at the time of its repayment.
In the case of loans granted to natural persons, the bank will also have to remember the PFSA recommendations resulting from Recommendation T (regarding good practices in the management of retail credit risk risk) when analyzing mortgage collateral. It contains, among others recommendation on a situation where the borrower earns income in a currency other than the currency of the loan taken. In such a situation, the bank, taking the value of the collateral, should take into account the appropriate buffer to cover foreign exchange risk related to the loan.
Similarly, a bank should act in relation to loans indexed by a currency or currency exchange rate, where there is also an element of currency risk. In the case of contracts of this type, the additional risk affecting the necessity to establish a mortgage with a higher amount is exchange rate volatility. The exchange rate of a given currency during the loan repayment period may be subject to major changes. In the event that there is a need to repay the whole loan, eg due to the termination of the loan agreement, the loan amount, which should be “covered” by the mortgage may significantly increase in relation to that expressed in PLN at the time of granting the loan. The buffer accepted by the bank should cover potential effects of the increase in the loan amount due to changes in exchange rates. The same will apply if the loan currency is different than the mortgage currency.
You can find opinions that a certain indication as to the amount of the mortgage sum is provided in the Act included in the Act on land and mortgage registers and mortgage on a compulsory mortgage (it is a mortgage established without the debtor’s consent to secure the claim established by the enforcement title ). According to this regulation, the sum of the compulsory mortgage may not exceed more than half of the secured claim along with claims for side-offs specified in the document constituting the basis for the mortgage entry as of the date of submission of the mortgage entry application.
However, this is not a generally accepted view, because the sum of the contractual mortgage set at 150% of the secured loan amount may turn out to be too low under certain circumstances, such as the exchange rate volatility mentioned above or a long loan period, e.g. 30 years. Therefore, the parameters of a given loan agreement may, in my opinion, constitute a reasonable basis for determining the mortgage amount at a higher level, eg 170 or 200% of the loan sum.
In summary, determining the amount of the mortgage sum depends on many issues. Banks in this respect are guided by extreme caution and take all of them into account when making such calculations.
What is excessive security?
However, it may turn out that the amount of the mortgage is too high in relation to the secured loan. Such a situation is referred to as over-collateralisation or over-collateralisation. The act on land and mortgage registers uses the second term, but it does not define it in any way. The lack of this definition means that the statement whether there is excessive security requires interpretation in the specific case. The phrase “excessive” suggests that the sum of the mortgage should grossly exceed the value of the loan. In order to determine this state of affairs, the amount of the secured loan should be compared with the amount of the mortgage disclosed in the land and mortgage register. However, this comparison must take into account the specificity and parameters of the loan. It seems that the excess collateral will be the amount obtained as a result of this comparison, which negatively significantly affects the creditworthiness of the owner of the encumbered property and will not belong to the creditor (bank) if he satisfied with the established mortgage.
Excessive security can be created in two ways:
– when the mortgage was established, ie when from the very beginning the mortgage amount grossly exceeded the value of secured loan receivables, so-called excessive primary protection, either
– after the mortgage has been established, for example as a result of repayment of a significant part of the loan, secured by a mortgage, so-called excessive post-collateral.
From the perspective of the mortgage debtor, excessive collateral may be important, because he may be interested in lowering the amount of mortgage that is encumbered with his property, eg in connection with the intention to take another loan.
What if the sum of the mortgage is excessive?
If the mortgage sum is excessive, the owner of the encumbered property has a certain claim against the creditor (eg a bank). According to art. 68 para. 2 of the Act on land and mortgage registers and mortgage, if the mortgage security is excessive, the owner of the encumbered real estate may demand a reduction of the mortgage sum. This entitlement, the person who established the mortgage has, regardless of whether he is a personal debtor (borrower) or only a debtor in kind providing security.
In order to fulfill its claim, the owner of the encumbered property should submit a written request to the bank (or other creditor if the mortgage secures a debt other than a bank loan), demanding the consent to reduce the mortgage amount and set an appropriate deadline for this. If the bank / creditor expresses his consent, then the application must be submitted to the land and mortgage court requesting to change the mortgage entry by lowering the mortgage sum. The application should be submitted on the official form used in the land and mortgage registration proceedings, pay (currently the court fee is PLN 100) and attach the bank / creditor’s consent to it.
If the bank / creditor does not agree to lower the amount of the mortgage, then such a claim can be brought to court. Theoretically, the owner of the encumbered real estate may assert his right, bypassing the submission of a written request to the bank, i.e. directly in court proceedings, but in that case he must reckon with the fact that he may be ordered to pay the trial costs.
The statutory regulation regarding excessive hedging due to the lack of its statutory definition triggers clarification in the banking community by way of an amendment to the act on land and mortgage registers and mortgage. At the moment, there are also no judicial decisions that could be an indication of such matters. If this state of affairs changes, it will inform you about it on the blog.?