With mortgage loans from banks booming these days, there are practical issues with the mortgages that borrowers grant on their properties. Since few people have an in-depth understanding of how mortgages work as a right and what consequences they have for a property, today we will take a detailed look at the issue. We will also explain what is known as a “mortgage pre-notation,” which almost always accompanies a loan to secure the lender bank.

1.What do we mean by the term mortgage?

By the term mortgage, we refer to the collateral that a creditor acquires on a property of the debtor (or even on a property of a third party) to secure the repayment of the debt between the creditor and the debtor. However, the debtor retains ownership of the property and can use/exploit it, given that it is irrelevant that the property is encumbered by a mortgage.

As mentioned above, the law does not require the mortgaged property to belong to the debtor=it is possible to grant a mortgage for the debtor even on a property belonging to a third party, provided, of course, that the third party consents to the mortgage. However, it should be noted that a mortgage does not “bind” the property in any way, so it can be freely transferred to another person, although it remains burdened with the mortgage. Based on this, the creditor can auction off the property regardless of who the owner is, provided that the mortgage has been legally established on the specific property.

Mortgages are usually granted in favor of banks within the framework of housing loans that borrowers take out, aiming to secure the banks for the collection of the loan. Therefore, great care is needed when reviewing related documents, as one needs to know which property the mortgage concerns, for what amount the mortgage is registered on the property, and whether the mortgage has been registered with the Land Registry/Mortgage Office, as only then does it legally exist, etc. We will discuss all these issues in the following lines.

2.How is a mortgage legally established on a property?

For the real right of a mortgage to legally exist on a property and be maintained lawfully, the law requires certain conditions, which are not particularly difficult. Thus, for a mortgage to be legally granted on a property, the following is required:

• There must be a property on which the mortgage is granted. As mentioned, the property can belong either to the debtor of the claim or to a third party, provided that the latter consents to the mortgage.
• There must be a monetary claim for which the mortgage is granted as security. If this monetary claim is invalid, the mortgage granted will also be invalid.
• The monetary claim, for which the mortgage is granted, may not have arisen yet and may be created in the future. In this case, a mortgage can still be validly granted, provided that the parties have at least defined the basic characteristics of the claim that will arise in the future.
• The contract granting the mortgage must be registered in public records, i.e., in the Land Registry of the area or the Mortgage Office. Without this registration, the mortgage is considered void against everyone, and no one can claim its existence on the property.
• If the mortgage is granted by private agreement (i.e., a contract between the parties), the debtor must consent to the granting of the mortgage on their property. Only in the case of a court decision can the debtor’s consent for granting a mortgage be bypassed.
• The request for a mortgage should not be made abusively=if the debt amount is relatively small and does not justify the granting of a mortgage, other ways of securing the creditor can be found, such as providing a personal guarantee from another person on behalf of the debtor instead of a mortgage.

3.What is the difference between a mortgage pre-notation and a regular mortgage?

As we have mentioned in another article, a mortgage pre-notation is simply a “temporary” mortgage, which, if the legal conditions are met, will be converted into a final and permanent mortgage. It is important to know that a mortgage pre-notation can now be registered on a property even through a payment order, where the debtor’s legal defense is limited, and they learn about it fairly late. Therefore, the mortgage pre-notation primarily serves the speed of transactions and prevents the debtor from fraudulently transferring their property to others with the intent to harm creditors to whom they owe money.

Regarding the conversion of a mortgage pre-notation into a regular mortgage, the law requires two conditions. First, a final court decision must be issued that accepts the conversion of the pre-notation into a mortgage, and second, after the court decision is issued, it must be recorded in public records, i.e., in the Land Registry or the Mortgage Office. This recording of the decision must be done within 90 days of its issuance. In cases where the pre-notation was registered on the property based on a payment order, the payment order must become final, as we have explained in another detailed article.

The same conditions for establishing a mortgage are required for a mortgage pre-notation, which we have already seen above. Additionally, the creditor who has registered a pre-notation of a mortgage on the debtor’s property can participate in the auction of the property when it occurs, but under certain conditions. That is, they must prove that they have converted the pre-notation into a final mortgage and present the relevant documents to the notary. Until they prove all of the above, they are randomly ranked on the distribution list for the proceeds from the auction—they do not immediately receive the amount corresponding to them, as it is withheld until all of the above facts are verified. Alternatively, they can receive the amount if they provide the notary with a guarantee letter from a bank.

4.Does the mortgage creditor have rights?What are they?

The creditor in whose favor a mortgage has been granted on a property by the debtor or a third party has certain rights granted by law to ensure that their position is not unjustly worsened. More specifically, the creditor is entitled to:

• Request through a lawsuit the prevention of harmful actions on the property if the debtor carries them out and demand the granting of a corresponding mortgage on another property if the property has deteriorated due to the debtor’s actions.
• Ask the debtor to insure the property against significant risks, such as fire, earthquake, or natural disasters, if this is required by the nature and type of the property.
• If the debtor does not insure the property, the mortgage creditor can insure it at their own expense, which they will eventually claim from the debtor either directly through a lawsuit/payment order or during the auction process, where they will demand an increase in the property’s starting bid price.
• If the property is insured and is destroyed for any reason, the creditor can demand that the insurance compensation be paid to them instead of the debtor, since the property will no longer exist to generate auction proceeds.
• In the case of compulsory expropriation of the property, the mortgage creditor can, as above, request through a lawsuit that the compensation be paid to them instead of the debtor.

5.Does the debtor have rights due to the mortgage?

It is logical and expected that certain rights correspond to the obligations of the mortgage creditor, even though the debtor has granted a mortgage on the property, they are not deprived of its use or prevented from transferring it to a third party, even without the creditor’s consent. Thus, the debtor who has granted a mortgage on their property is entitled to:

• Request a reduction in the amount for which the mortgage was registered on the property if it is disproportionately high/low relative to the property’s value. For example, a mortgage cannot be registered for a debt of €3,000 on a property worth €200,000.
• Request the cancellation of the mortgage if it was abusively registered on the property=if the creditor could have been secured by another guarantee in favor of the debtor but chose to register a mortgage on the debtor’s property for personal reasons.
• In the same scenario, if mortgages have been registered on multiple properties of the debtor for the same debt, the debtor can request that the mortgages be limited to fewer properties if the mortgages are not justified by the amount of the debt.
• Prohibit the creditor from visiting the property to present it to prospective bidders at the auction. This practice, which used to happen in the past, has now been completely abolished by law, regardless of who attempts it.
• The debtor is obviously entitled to continue exploiting the property (e.g., renting it out) without any restrictions due to the mortgage. However, they cannot cause significant damage to the property that would greatly reduce its value, as mentioned earlier.

6.How is a property covered by a mortgage?

Since there are several issues in practice regarding the extent of the property covered by the mortgage, it should be noted that the rule is that the mortgage generally covers the entire property to which it is granted. There are some exceptional cases where the mortgage may cover only an ideal portion of the property (e.g., 2/5 undivided ownership), but since these rarely occur in practice, we don’t need to analyze them in detail.

As we mentioned in another article, every property has components and attachments, meaning objects that are so closely connected to the property that the law treats them as an economic and legal entity. What is interesting in the granting of a mortgage is that it extends to the components and attachments of the property, such as an external roof that has been constructed on it, or the heating oil used for warmth during the winter. However, since the attachments of the property can be freely transferred and thus separated from it, once this separation occurs, the mortgage no longer exists on the objects that were considered attachments of the property.

Furthermore, we should keep in mind that the amount of the claim for which the mortgage is secured (e.g., a loan of €200,000) is different from the value of the property on which the mortgage is granted (e.g., an apartment worth €70,000). The rule here is that the mortgage only covers the amount of the claim for which it was registered on the property (i.e., only the value of the loan). However, this does not apply if the mortgage was registered on a property with a value lower than that of the creditor’s claim—in this case, the mortgage will apply to the full amount of the creditor’s claim, and an auction of a lower-value property will not eliminate the mortgage for the future, as it will not satisfy the creditor’s claim.

7.What happens if I transfer the mortgaged property to someone else?

A basic principle of mortgage law is that a mortgage does not deprive the owner of the mortgaged property of the right to use/exploit it, so they can transfer it to a third party if they wish. In fact, the third-party buyer can protect themselves legally from the possibility that the property is encumbered with a mortgage by conducting a title search at the relevant Land Registry/Mortgage Office before purchasing it. It is also good to know that an unlimited number of mortgages can be registered on a property, so granting a second mortgage on the property is neither void nor does it invalidate the transfer in any way.

However, in the case where the third-party buyer was unaware that the property they acquired was encumbered with a mortgage, the question arises whether they can cancel the contract and recover the money they paid. The law is particularly strict here, emphasizing that since there are public records that the buyer can consult before acquiring a property, they cannot claim they were misled about the existence of a mortgage, especially if they didn’t conduct a title search. Therefore, in this scenario, the transfer contract cannot be canceled, and the buyer will have to accept the existence of a mortgage on their property.

Things are different, however, if the property owner and thus the seller colluded with their creditor so that the mortgage was registered in the public records much later, even just before the transfer, so that the buyer couldn’t have known about its existence, even if they were extremely diligent. In this scenario, unlike the previous one, the buyer can request the cancellation of the sale contract and, consequently, the transfer of the property. Furthermore, if they prove the collusion between the seller and the creditor, they can file a lawsuit for damages due to fraud for the deceptive concealment of the mortgage registration on the property, as well as file a criminal complaint for the crime of fraud to initiate criminal prosecution against the perpetrators.

8.Can a mortgage be registered on the usufruct of a property?

Given that the law allows the greater (i.e., to grant a mortgage on the ownership of a property), it logically also allows the lesser (i.e., to grant a mortgage on the usufruct of the property). However, for this to happen, the property owner must have already legally separated the usufruct from the full ownership, meaning the usufruct must have been granted to a third party through a notarial deed.

Otherwise, the granting of a mortgage on the usufruct of a property follows the same regulations as a mortgage on the ownership of the property. This means that it also extends to the components and attachments of the property, unless the parties have agreed otherwise. As for foreclosure, only the usufruct of the property as a right will be offered to prospective bidders, meaning that the bare owner of the property will still be able to use it and perform transactions on it, in consultation with the (new) usufructuary.

If the property belongs to multiple owners as undivided parts, it is also possible for the usufruct to be granted to multiple individuals, each exercising it according to their share. Therefore, a mortgage can be granted on a portion of the usufruct (e.g., 2/16 of it), and the creditor who has registered a mortgage on the usufruct can liquidate it by selling the corresponding portion through foreclosure. Furthermore, a mortgage registered on the usufruct of a property is extinguished for the same reasons mentioned below. However, the merging of bare ownership with the usufruct, thus acquiring full ownership by the owner, does not eliminate the mortgage on the usufruct, so it remains in force.

9.How is a mortgage terminated for the future?

The law provides several reasons, any of which, if applicable, will terminate a mortgage on the ownership of a property for the future. The same applies to the granting of a mortgage on the usufruct of a property. Therefore, a mortgage is terminated for the future:

• When the claim for which the mortgage was granted is extinguished in any way (e.g., when the debtor pays off the creditor or when someone else assumes the debtor’s debt, etc.).
• When the mortgaged property is physically or legally eliminated in any way (e.g., when the property is destroyed by a natural disaster or when it is compulsorily expropriated). Simply transferring the property to someone else does not, of course, terminate the mortgage as previously mentioned.
• When the creditor waives the mortgage right on the property. This typically happens after reaching an agreement with the debtor regarding debt settlement or repayment.
• When the mortgaged property is auctioned, the mortgage is obviously no longer valid, as the buyer acquires the property free of encumbrances upon paying the sale price.
• When the creditor’s financial claim against the debtor has either expired due to statute of limitations or has not been pursued for an extended period, leading the debtor to reasonably believe that the creditor would no longer seek repayment or the foreclosure of the property.
• The deletion of a mortgage from the public records is entirely different from the substantive termination of the mortgage right and should not be confused with each other. Once the mortgage is substantively terminated, it can then be deleted from the public records.

10.I have a mortgage on someone else’s property.How much money will I receive from the auction?

To answer this question clearly, we must understand the concept of “mortgage ranking.” Simply put, each mortgage registered on a property is assigned a position in a ranking where all mortgages registered on the property are listed. This becomes relevant when more than one mortgage is registered on a property, which is not uncommon, particularly in the case of loans granted by banks.

The key point is which mortgage was registered first and which follow in the ranking. The conclusion is that creditors whose mortgages are higher in the ranking will receive a larger share of the auction proceeds when the property is auctioned. However, if two creditors have registered mortgages on the same property, and these mortgages are ranked equally, they will be satisfied proportionately, i.e., in equal parts, during the distribution of the auction proceeds.

It is also worth noting that when a debtor’s property is auctioned, there are often multiple creditors waiting to be paid from the proceeds. Therefore, it is possible that these creditors may have acquired real securities on the debtor’s property (e.g., other mortgages) or have another legal relationship with the debtor (e.g., they were employees of the debtor’s business). Thus, the law provides that the creditor with a registered mortgage on the debtor’s property is preferentially satisfied from the auction, receiving 65% of the auction proceeds before the other creditors, except those who provided services to the debtor in recent times, as they also have significant priority during the auction of the property.

Next to the client and his needs.

Athina Kontogianni-Lawyer

The above does not constitute legal advice, and no responsibility is assumed for it. For more information, please contact us.