‘When we buy a more expensive asset – a house or a car – we pledge it as collateral to the lender. Sometimes, you also need collateral when borrowing a larger amount of money, such as when renovating your home. This is an undertaking to the creditor that the borrower will keep to the loan or credit terms. Legally, the collateral belongs entirely to the owner, who owns the property, but there is still a misconception that the bank owns the collateral. So sometimes, out of lack of knowledge, some misunderstandings arise, and it is essential to understand your rights, duties and responsibilities as the property owners so that misunderstandings do not become problems,’ emphasises Citus expert.
What makes a mortgage important and convenient
Pukelienė explains that a mortgage agreement is usually executed when buying a property. This concept is also unclear to everyone, and she says it is a contract with additional and specific conditions, some of which are important and beneficial to the borrower and the mortgagee.
Officially, the mortgage shall mean the real right to another’s immovable thing whereby the performance of a present or future property obligation is secured without transferring the mortgaged property to the creditor. A mortgage agreement ensures that if the borrower fails to meet the contract terms, the creditor has legal means to recover the money.
To elaborate: ‘In simple terms, a mortgage agreement is a commitment by the borrower, like a „guarantee“ to the creditor, to fulfil all the terms and conditions of the credit agreement. A mortgage agreement is only concluded in the case of a mortgage on immovable property and is registered in the public register. It used to be called the Mortgage Register and is now called the Register of Contracts and Restrictions of Rights, which the State Enterprise Centre of Registers manages. The self-service of the Centre of Registers makes it possible to find information on mortgage or pledge contracts that have been concluded and registered. It is essentially a statutory system for securing borrowing, which simplifies the resolution of conflicts between debtor and creditor, as there is no need to go to court for the recovery of debt – a notarial writ of execution shall be an enforceable and enforcement document submitted to the bailiff for enforcement. It also protects people who borrow’.
First of all, under the Civil Code, a creditor may not unreasonably enrich himself at the debtor’s (mortgagor’s) expense, and the latter shall have the right to claim compensation if the debtor suffers losses incurred as a result of the recovery procedure illegally enforced by the creditor or a forced sale of the object of the mortgage.
Nor does the mortgage prevent, if the credit agreement permits, the early repayment of the credit: once the obligations under the credit agreement have been fulfilled and the credit agreement has been completed, the mortgage will be terminated.
In general, a mortgage does not take away or replace the right of the owner of the mortgaged property to manage, use and dispose of that property, subject to the rights of the mortgage creditor: it may be transferred by the owner to another person, re-mortgaged, rented or gifted. In the case of a sale, the debt owed to the creditor is usually paid out of the proceeds. Still, the owner may also have the right, in agreement with the creditor, not to repay the debt but to transfer it, together with the mortgage, to another person (the new debtor) who agrees to and assumes the debtor’s obligations to the creditor under the credit agreement.
Another convenient feature is that a mortgage can also cover a part of real estate, such as a parking space or a piece of land, as long as the property’s value is sufficient to secure the obligations. In this case, the property owner does not need to mortgage the whole property.
It is essential to carefully examine the terms of both the credit and mortgage agreements: who will be the parties to the mortgage agreement, and whether the subject of the mortgage, the amount of the credit, the repayment terms, additional mandatory payments and other conditions are correctly specified as agreed. Equally important are the terms of the mortgage itself: what the owner of the mortgaged property can do with it, how and when the mortgage shall extinguish and what happens if the worst-case scenario is realised: in what cases and in what order the creditor has a right to recover from the object of the mortgage. The circumstances and grounds for recovery of the amount of credit provided are usually set out in both the credit agreement and the mortgage agreement. Therefore, it is necessary to analyse the latter as well.
What to do and what to avoid when facing difficulties
Pukelienė ‘It seems a simple and obvious fact: if we want to buy an expensive item and borrow money, we must repay it and comply with the other contract terms. When there is a need or a strong desire, we make those commitments firmly, and everything seems clear. But sometimes, when circumstances change, the situation becomes unfavourable and we are challenged to honour the contract, so everything starts to look different. The circumstances may seem exceptional, very important and justified, but contracts and the law have no place for emotions; they are agreements, rights and obligations. So, it is advisable not to get distracted by these emotions, not to generate unnecessary stress, but to address the situation before it becomes a problem’.
She emphasises that the purchaser of the property, whether by mortgage or other pledge, is the property owner and, as mentioned above, has rights and obligations. These include maintaining the property, paying taxes, managing and repairing the apartment, and pooling funds with the neighbours in the case of a multi-apartment building.
She points out that there are cases where people who have bought and mortgaged a home with a credit believe that the creditor, who is responsible for critical decisions about the property, will become the owner of the house and that the debtor will be able to avoid some of its liabilities.
‘But this is not the case: the owner of the property, not the creditor, is responsible for all these and other obligations, and there is no point trying to avoid it. Just like with credit or mortgage contracts, ignoring notices, changing your address or moving abroad will not solve the problem but only make it worse – forcing the creditor to take extreme enforcement action. I have often heard from colleagues working in credit, debt management and transactions that people in these circumstances are negligent. It is essential to be rational and resolve the situation promptly because there are solutions, and delay or recklessness can become a major dilemma’, she warns.
If you are struggling to meet your credit agreement’s obligations – making your loan payments on time – there are different solutions. A starting point is to negotiate a temporary postponement of repayments or an extension of the repayment period with the creditor, which would reduce the monthly repayments.
Other solutions are more challenging to implement but are also equally possible: selling the mortgaged property to repay the loan, selling it together with the liabilities; renting it out and using the rental payments to repay the loan, refinancing the existing loan; pledging an additional property or mortgaging another’s property if the value of the property is equal to the amount of the liabilities. There are other solutions, according to the individual situation.
The owner of the collateral makes all these decisions on how to proceed on their initiative, but they must be coordinated with the creditor and subject to the creditor’s consent.
Pukelienė summarises: ‘We live in a time of constant urgency when we often don’t have sufficient time and opportunity to save the full amount needed for a large purchase. But it is also a great opportunity to borrow and make dreams come true. Let’s do just that, but let’s take the time to familiarise ourselves with our obligations, honour them and approach changing circumstances responsibly’.
