two percent annually. The surprise is all the greater when the notary reads out the mortgage deed. The interest on the land charge amount promised by the bank is usually between twelve and 15 percent, sometimes even a little higher.
How does this interest rate come about? Is it a kind of penalty or default interest rate for late payment?
The answer is: No. The agreement of such a high interest rate for a long-term loan secured by land charges would not even be effective. Land charges are never interest that is actually paid in the recorded amount. Only the interest agreed in the loan agreement is paid. They are therefore economically decisive.
But why does the bank have these high interest rates promised? As is well known, the land charge only serves as security in the event that the obligations arising from the loan agreement are not fulfilled. But why is the land charge interest rate higher than the loan interest rate?
The bank primarily has two scenarios in mind here:
- Firstly, the bank routinely assumes that you will not repay the loan within the fixed-interest period agreed in the loan agreement, or not in full. However, if follow-up financing is then required in five or ten years' time and inflation has set in at that point in time, the standard market loan interest rates may be five, seven or nine percent per year, as was the case many years ago. A very high interest rate is set as a precautionary measure so that the land charge that has now been created can also serve as security for any higher loan interest rates that arise as a result.
- Theoretically, the bank may be entitled to interest above the contractually agreed rate even before the fixed interest rate expires. This happens, for example, if the borrower falls into arrears and the bank does not receive the loan installments or the entire loan amount back on time. If the bank then has to pay higher interest than the loan interest agreed with the customer for the funds that it raises itself on the capital market due to inflation in the meantime, it could claim the difference from the borrower for the period of default as default damages. This increased default interest would then also be covered by the land charge interest.
Ultimately, the high land charge interest therefore primarily extends the scope of the land charge as security. The actual interest to be paid is determined solely by the loan agreement and the law.
Dr. Matthias Krisch