Abbreviated as MTGE by Abbreviationfinder, the mortgage is the guarantee of payment of a debt in the form of a property. The term is often used to refer to the type of financing that uses a property as collateral.
The mortgage is the main type of real estate financing practiced in Brazil, with the financed property itself serving as a guarantee for the credit granted by the bank for its acquisition. When it comes to real estate financing in Brazil, it is almost certain that it is a mortgage, although this expression hardly appears in the advertising of financial institutions.
Those who already own a property in their name can also mortgage it to obtain loans for other purposes, for example, to open a business or finance their studies.
Advantages and disadvantages of the mortgage
The advantage of a mortgage loan is the possibility of obtaining higher amounts, with longer terms and lower interest rates than other types of credit.
However, if the debtor fails to pay the debt, he will lose the property he offered as collateral, which is the main risk of the mortgage. As the asset was pledged voluntarily by the debtor, it can be taken even if it is the only property in the family.
How does the mortgage work?
In this type of credit, the mortgaged asset is in the name of the borrower, but a contract is signed that guarantees the creditor’s right to it in the event of default. The registration of the mortgage is made in the registration of the property, so that it is public.
While paying your financing, the debtor will be able to normally enjoy your property. This is where the mortgage differs from the pledge mechanism. In the pledge, the guarantee is delivered to the creditor while the debt is not paid. For requiring this physical transfer of the guarantee, the lien is only applied in the case of movable assets (jewelry, vehicles or machines, for example), unlike the mortgage.
The mortgage is an indivisible right, that is, the mortgaged asset will remain fully in guarantee until the debt is fully paid. This means that the debtor will lose the entire property if he does not pay off his debt, even if he has already paid most of it and the outstanding debt balance is well below the value of the asset.
Another feature of the mortgage is that the lender will be able to execute it even if the property is no longer the debtor’s. This is possible because the legislation does not prevent a mortgaged property from being sold to someone else. The buyer of a mortgaged property may lose it if the former owner defaults.
It is the Civil Code that establishes the mortgage rules, in articles 1,473 to 1,505.
Mortgage types
Conventional mortgage
It is the most common type of mortgage, which is signed by mutual agreement between creditor and debtor. It encompasses commercial financing contracts that use a property as collateral.
Legal mortgage
Little used in practice, the legal mortgage is an instrument provided for in legislation that aims to prevent or compensate for possible losses. It does not depend on the debtor’s approval, being provided by law for some situations. An example is the right given to children over the properties of the father or mother who remarry before taking an inventory of the previous marriage.
Judicial or judicial mortgage
This type of mortgage is determined by the courts, which can mortgage the defendant’s assets in favor of the other party in the process to ensure compliance with the final sentence.
Mortgages and the crisis in the United States
The mortgage is a common type of loan in the United States. The classic mortgage model used in the country established a fixed interest rate, which was valid throughout the loan period.
In the first decade of the 2000s, American banks started betting on mortgage loans to customers without a history of good payers, using a post-fixed interest rate.
The so-called subprime crisis, which broke out in 2007 in the United States, had its origin in the uncontrolled increase in subprime mortgage lending.
The increase in interest rates in the American economy meant that many of these debtors were no longer able to pay their debts. At the same time, the drop in property prices reduced the value of the guarantees that had been given to loans. This scenario led to a crisis in the country’s financial system, which eventually spread around the world.
