Real estate pledge: definition
Under Swiss law, the real estate pledge is a legal security that the bank takes over a property (house, apartment, building) to secure the repayment of a mortgage loan. Concretely, the real estate pledge is a limited right in rem recorded in the land register: it encumbers the property and secures a claim (for example your mortgage).
If you no longer meet your payment obligations (interest, repayment), the bank may realize the real estate pledge, i.e., trigger the forced sale of the property to reimburse itself from the sale proceeds.
According to the Swiss Civil Code, the real estate pledge can be created in the form of a mortgage or a mortgage certificate. In current practice, the mortgage certificate has become the central instrument: it is a personal claim (the mortgage amount or more) secured by a real estate pledge and recorded in the land register. It is this combination – claim + real estate pledge – that enables banks to offer mortgage rates that are significantly lower than for an unsecured loan.
Legal aspects of the real estate pledge
From a legal standpoint, the real estate pledge is a security right:
- it does not transfer ownership of the property to the bank;
- it grants the creditor a right of preference over the price obtained from the sale of the property, according to a ranking order determined by the entries in the land register;
- it is strictly governed by the Swiss Civil Code (Art. 793 et seq. SCC).
For a real estate pledge to be valid, two conditions are essential:
- Notarial deed
Creating a real estate pledge (mortgage or mortgage certificate) requires a notarial deed, generally drawn up by a notary. - Entry in the land register
The real estate pledge comes into existence through its entry in the land register. This entry is decisive and determines, in particular, the rank of the pledge (priority of payment compared with other creditors).
Mechanism of the real estate pledge
In the context of a mortgage loan, the mechanism is as follows:
- The bank grants you a loan (for example CHF 800,000), and a mortgage certificate of a corresponding amount (or slightly higher) is created or used.
- This certificate represents a personal claim secured by a real estate pledge over your property.
- The certificate is recorded in the land register: from that point on, the real estate pledge is enforceable against third parties (other creditors, future buyers, etc.).
The amount of the real estate pledge recorded (for example CHF 800,000) indicates the secured ceiling, but it does not always reflect the actual debt at a given moment: even if you amortize part of the mortgage, the amount of the certificate does not automatically change. This can make it possible to reuse the same certificate in the event of additional financing, without having to create a new real estate pledge.
In the event of a prolonged payment default, the real estate pledge fully plays its role as security:
- the bank may terminate the loan agreement and initiate enforcement proceedings for the realization of the real estate pledge;
- the property is then sold (in principle by public auction) under the rules governing debt enforcement and bankruptcy;
- the sale proceeds are distributed among creditors according to the rank of each recorded real estate pledge;
- if the sale proceeds exceed the total amount of the secured claims, the balance goes to the owner;
- if the sale does not fully cover the debt, the unpaid balance generally remains due from the debtor (a claim that is not, or is no longer, secured).
Because the real estate pledge significantly reduces the risk of non-repayment, banks can grant long-term mortgages at rates that are noticeably lower than for a consumer loan or a personal loan, which, by contrast, are not backed by a real estate pledge.
Example of applying the real estate pledge
You buy an apartment in Switzerland for CHF 1,000,000.
- You contribute CHF 200,000 in equity.
- The bank finances CHF 800,000 in the form of a mortgage loan.
To secure this financing, a mortgage certificate of CHF 800,000 is established in your name and recorded in the land register. This certificate is linked to a real estate pledge over your apartment:
- the certificate states the amount of the real estate pledge (CHF 800,000), the encumbered property and the creditor (the bank);
- in parallel, you sign a mortgage loan agreement with the bank setting out the amount actually lent, the rate, the term, amortization, etc.
For years, you regularly pay interest and amortization. The balance of your debt may, for example, drop from CHF 800,000 to CHF 650,000, but the recorded real estate pledge remains at CHF 800,000 as long as the certificate is not amended or cancelled.
Two scenarios are possible:
Everything goes smoothly
You continue to meet your payments. The real estate pledge remains purely theoretical: the bank has no right to use or sell your property as long as you meet your obligations. If, one day, you fully repay the mortgage, the certificate can be kept (with no effective debt, but still available for future financing) or cancelled from the land register.
Prolonged payment default
Following a drop in income, you stop paying interest and amortization on a lasting basis. After seeking solutions (rescheduling, voluntary sale of the property, etc.), the bank ultimately initiates proceedings to realize the real estate pledge. The apartment is sold in enforcement proceedings:
- if the property is sold for CHF 950,000, the bank is repaid up to the amount of its claim (for example the CHF 650,000 still due + interest and costs), and the balance is paid to you, possibly after payment of other privileged claims;
- if the property is sold for only CHF 600,000, the bank receives that amount on the basis of the real estate pledge, but an uncovered debt balance remains (for example CHF 50,000 + costs) which remains due without real security.
