Understanding the Characteristics and Importance of Mortgage Contracts

In this way, if the debtor fails to pay his debt, the creditor has the right to demand the sale of the property in order to collect the debts due to him. Accordingly, a mortgage is a debt instrument that provides the creditor with a security interest using an asset owned by the debtor as collateral.

Characteristics of a mortgage

Mortgages are usually granted on real property such as houses or land, but it is also possible to mortgage personal property such as vehicles or works of art.

One of the most important features of the mortgage is that the asset left as collateral remains the property of the borrower. For example, a person can take out a mortgage on their home without having to leave it to hand it over to the creditor.

In the event that the debtor defaults on his debt, the mortgage gives the creditor the right to demand the sale of the property pledged as collateral through a public auction (not a direct sale). The creditor can collect his claim from the collected amount and leave the rest to other creditors or the same debtor.

What are mortgage contracts for?

Generally, mortgage contracts are used to obtain long-term financing and obtain a significant portion of resources that would otherwise be difficult to obtain. An asset as a guarantee of payment reduces the risk of the creditor (who can keep the asset in the event of non-payment) and thus facilitates lending. For example, in Spain, many mortgage contracts are used to obtain financing to buy houses.

The mortgage has the great advantage that the debtor does not have to provide the property as security and can continue to enjoy it. However, it has the disadvantage that in times of crisis the value of the collateral can drop significantly, so that the amount obtained at auction is not enough for the debtor to cover his debts.

Basic elements of a mortgage agreement

• On the one hand there is the capital, i.e. the total amount of funds that are loaned to the debtor. The principal borrowed is usually less than the value of the asset left as collateral for the mortgage.
• Then there is the interest rate, which involves a collection of a percentage (fixed or variable) on the debt in favor of the lender.
• The third element is the term, which indicates the time when the borrowed money is expected to be repaid.

Let’s see an example: Juan (debtor) signs a mortgage agreement with Bank A (creditor). This contract provides that the bank will lend you an amount of 50,000 euros (principal) at an interest rate of 7% per year. For his part, Juan agrees to pay this loan over 10 years (in monthly installments) and leaves a property worth 70,000 euros as a mortgage guarantee.