Mortgage guarantees: what does the bank require?

What guarantees do banks usually require to provide a mortgage? This is an important question for those planning to take out a loan to buy real estate, whether it is the first or second apartment. When issuing a large loan, the bank seeks to minimize risks and requires confidence that the borrower will be able to repay the debt.

Why do banks require guarantees?

When a bank provides a mortgage, it faces certain risks, such as the possible insolvency of the borrower, which could result in the bank losing the capital it has issued. To reduce these risks, banks require guarantees from borrowers. These guarantees give the bank the opportunity to get its money back even in the event of default. The main types of guarantees include:

1. Mortgage : The most common form of guarantee, where the bank takes title to the property. If the borrower stops paying, the bank can sell the property to recover the funds.

2. Surety (Fideiation) : In this case, a third party (the guarantor) undertakes to repay the debt if the borrower fails to make payments.

3. Collateral (Mostly a rare option) : Can be used as additional security, but is typically used for other types of loans, not mortgages.

How does a mortgage as a guarantee work?

A mortgage gives the bank the right to the property if the borrower defaults. This means that the bank has priority over other creditors when selling the mortgaged property. The mortgage is taken out for an amount greater than the loan itself, to cover any additional costs that may arise, such as interest, legal fees, and insurance.

Surety as a guarantee

A suretyship is where a third party (the guarantor) takes responsibility for the loan payments if the borrower fails to make them. This agreement is formalized by a special contract, and the guarantor may bear the same responsibility to the bank as the borrower.

Additional guarantees

Sometimes the bank may require additional guarantees if the main mortgage or surety seems insufficient. For example, the borrower may offer another property as collateral or take out insurance that will cover the loan payments in the event of job loss or other unforeseen circumstances.

When does a bank refuse a mortgage?

The bank may refuse a mortgage if:

• The property does not meet the requirements (e.g. is not in a saleable condition).
• The guarantor does not have sufficient financial stability.
• No additional guarantees are provided in case of increased risk.

It is always worth comparing the terms of different banks before entering into a mortgage agreement, as the requirements for guarantees may differ.