What is security for a loan?

There are two types of loan collateral:

• Personal security: Here, a third person is liable for the loan with their assets.
• Real or material collateral: Here things (securities, salary claims, land) are used as collateral. In principle, anything that is valuable and can be sold quickly by the bank if necessary can be considered real collateral.

In the following, we explain the most important types of loan collateral in more detail :

Wage claims or other claims

In some cases, debts that others owe you are considered collateral. This is also called “session” or assignment of claims. 

Wage and salary claims can serve as security.

Let’s assume you have rendered service and a customer owes you a fee or has yet to pay an invoice for one of your deliveries of goods. However, you have debts with the bank and want to secure or settle a loan with the bank with your claim. Then you are the so-called assignor and the receiving creditor (the bank) is the assignee. An assignment is the transfer of a claim to a new creditor. The assignment takes place using a contract between the assignor and assignee.

This can also affect wage and salary claims. Because these are also claims, in this case against the employer. When wage and salary claims are assigned to a lender, the latter may only assert its claims if you, the borrower, default on your payments. Then the bank can garnish your salary, whereby you are always entitled to the statutory subsistence level. With a monthly salary of 2,500 euros (monthly payment with special payments, no children), this will be 1,450 euros in 2021, for example.

Gold and securities as collateral for a loan

With a Lombard loan, you receive a loan against the pledging of movable valuables. There are different Lombard loans: 

• The most expensive is the gold loan from pawnshops, which is only intended for a few months as a short-term bridging solution and should only be used in extreme emergencies.
• Lombard loans from banks that are secured with securities are much cheaper (approx. 2.5 to 4.0%). In practice, this occurs primarily in brokerage (securities trading) when the liquid funds on the clearing account run out.

Real estate as security for the loan: the mortgage security

Mortgage collateral is common for home loans, with the property itself serving as collateral for the loan. Since the property is always in the same place and cannot be taken as a pledge, as is the case with gold lending, a pledge is identified utilizing appropriate documents in the land register.

The bank enters the amount of the debt plus a security cushion of 20 to 30% as a mortgage. For example, if you borrow EUR 100,000, the mortgage is usually EUR 120,000 to 130,000. In this context, it is said that the mortgage security is 120 to 130% of the loan amount.

Insurance

Insurance can also serve as collateral for a loan. In particular, these are credit balance and life insurance policies: If the borrower dies prematurely, the outstanding loan amount will be paid by the insurance company.

In the case of credit balance insurance, only the open loan amount is usually insured – the insured amount, therefore, decreases over time. In the case of life insurance, on the other hand, a fixed, constant sum insured applies. In the event of death, the outstanding loan amount is paid first, the rest goes to the surviving dependents.

Guarantee

Another form of loan security is the guarantee. Here, a third party – the guarantor – undertakes to take over the loan debt if the borrower cannot repay it. There are different forms of guarantee, for example:

• Guarantor and payer: In the event of late payment, the bank can contact the guarantor immediately.
• Default guarantee: In the event of a default in payment, the bank must first take all reasonable steps (claim and execution) to receive payment from the borrower. Only then can she turn to the guarantor.

In any case, a guarantee is a serious obligation that needs to be carefully considered. An existing guarantee also influences the creditworthiness of the guarantor himself and is evaluated like a self-taken-out loan.

What is a mortgage?

In the case of real estate loans, security in Austria is traditionally provided in the form of a mortgage. It is a mortgage in which the borrower cedes rights to their property to obtain a loan. The mortgage is entered in the land register. 

With mortgages, a distinction is made between fixed-amount mortgages and maximum-amount mortgages. In practice, the maximum amount of mortgage is becoming increasingly important. 

The fixed-amount mortgage is used to secure a very specific – i.e. fixed – sum. 

With the maximum amount mortgage, the bank owns the right of lien up to a certain maximum amount. This amount is independent of whether you owe the bank that much money. The maximum amount only means that the bank can only assert its right of lien up to this amount. The remainder up to the actual market value can then also serve as security for other creditors. The bank’s specific right of lien in the event of your payment default, however, only exists up to the actual loan amount. 

Example: Suppose you can no longer pay a remaining debt of 120,000 euros. The original loan amount was 150,000 euros and the maximum mortgage amount was 180,000 euros (150,000 euros plus 20%). The bank sells the property for EUR 250,000. In this case, you would still get 130,000 euros. The remaining debt of 120,000 euros, however, goes to the bank.

Selection of loan collateral: This is important to note

In many cases, the collateral enables the conclusion of financing. When securing real estate loans, it often depends on how much this loan collateral is worth.

For example, if you buy warehouses to rent them out, you will probably need a relatively large amount of your funds (usually at least around 40%). Because the warehouses do not represent very valuable collateral.

On the other hand, if you have a high income, you can sometimes even finance first-class new apartments in a good city location without having to use your funds. You then often only have to pay around 10% of the purchase price in additional purchase costs. The bank finances the purchase price in full – of course against 100% lending on the apartments or other valuable collateral. 

Otherwise, 80% loan-to-value ratios are common for residential real estate, at least in good locations.

Based on these examples, you can see that the more valuable the collateral you provide, the lower the equity required, provided your income is right.

However, if you have little or no equity and the security provided by the property is not sufficient for your bank, you can bring in additional security – for example in the form of:

• Endowment life insurance with high surrender values
• home savings contracts 
• securities.

The collateral will only be valued at certain quotas (e.g. equity funds with 40%). However, the amount of “average” collateral can also allow you to finance.

And there is another positive aspect of collateral:

Collateral for loans: helps to lower interest rates

When securing real estate loans, you can negotiate better interest rates with good collateral. If a bank in the first rank in the land register has a maximum loan-to-value ratio of 60%, then special conditions in the form of significantly lower interest rates often beckon. This would be the case, for example, if you buy a property worth 300,000 euros but need a maximum of 180,000 euros in credit. Here it is also worth talking to the housing finance experts from Infina, who always keep an eye on such cheap offers.