Swiss banks provide builder-owners with a mortgage-secured overdraft facility to finance new construction or convert existing properties only under certain circumstances (supplying a portion of equity capital, a partial real estate sale safeguard or rental, or a possible amortization). This involves a line of credit, available according to construction progress of the project. In the past, banks granted construction loans only through mortgage assignments (maximum mortgage). This necessitated a renewal of the construction credit claim as a claim on the mortgage deed after completion of construction or when the definitive outside financing need was known, and required a costly consolidation of mortgage assignment by means of a mortgage deed. Today, banks provide financing through loans as well as mortgages. As a rule, loans are granted through fixed advances paid in stages. This requires coordination with construction progress and/or pro-rata contractor’s fees. Bank interest rates vary, depending on the general contractor’s solvency.
Financing through mortgage loans is the conventional way of financing real estate purchases. The loan claim is renewed as a claim on the mortgage deed. The mortgage consists of personal liability and material liability of the property. If the real estate loan, or a business loan or lombard credit, is secured by means of pledged collateral, then either the actual mortgage deed, or the right of attachment on the claim resulting from the document, serves as collateral. Unlike mortgage loans, where the real estate is converted into cash if payment difficulties arise, with mortgage pledges the paper itself is auctioned. If no successful bidder emerges, the issuing bank assumes liability, and subsequently sells the property. The high cost of such a “double realization” inspired former bank lawyer Prof. RA Dr. Dieter Zobl to be creative. He created the “assignment as security”, in which the advantages of a mortgage (single realization) and a loan against a pledge (possibility of securing multiple claims with different titles) are combined (see below).
Rights of lien
Swiss law recognizes the following rights of lien:
- mortgage deed
- mortgage assignment.
Next to mortgage deeds, mortgage assignments and pledged collateral, banks also demand personal securities (guarantees, sureties) for their credits.
Conventional security arrangements
Real estate financing is conventionally secured by means of
- 1. Mortgages where the bank becomes the owner of the mortgage deed, and
- 2. other mortgages in the form of pledged collateral (where the bank holds the owner’s mortgage deed as collateral).
Assignment as security
On the Swiss real estate financing market, assignment as security – although not covered by law – has evolved as the most flexible security for mortgage-secured loans. Assignment as security means that the property owner provides collateral to the crediting bank by transferring ownership on trust of the pledged mortgage deed. In cases of default, the creditor converts the trust asset into cash, to be used as credit against capital, interest and expenses, free of the legal limitations governing allocation and use.
Deeds of pledge, general conditions
In most cases, banks secure the credit relationship by means of their General Conditions and General Deeds of Pledge, which include all of a debtor’s assets and which give them the right to offset, retain, convert into cash and assume title.
Exclusivity and rental assignment
Credit conditions often stipulate that the debtor agrees to use the bank for all of his payment transactions, or at least those in connection with the loan. In Switzerland as in neighboring countries, rent assignment is increasingly a part of property financing. Tenants are notified thereof only in cases of debtor default and/or violation of transaction exclusivity arrangements.