Mortgage Financed Construction
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- The Buyers of residential property form an Association.
- The Buyers’ Association signs a contract with a construction company
chosen by open and public tender.
- The contract with the construction company is for the construction of
residential property to be owned by the Buyers.
- The Buyers secure financing from the Bank (see below).
- The Buyers then pay the construction company 25% of the final value of the
property to be constructed in advance (=Buyer’s Equity). This money is the
Buyers’ own funds, out of pocket – NOT received from the Banks.
- The Buyers Association together with the Banks appoints supervisors to
oversee the work done by the construction company: its quality and adherence
- The government provides a last resort guarantee to the commercial banks.
This guarantee can be used ONLY AFTER the banks have exhausted all other legal
means of materializing a collateral or seizing the assets of a delinquent
debtor in default.
- Against this guarantee, the commercial banks issue 10 years mortgages
(=lend money with a repayment period of 120 months) to the private Buyers of
- The money lent to the Buyers (=the mortgages) REMAINS in the bank. It is
NOT be given to the Buyers.
- The mortgage loan covers a maximum of 75% of the final value of the
property to be constructed according to appraisals by experts.
- A lien in favour of the bank is placed on the land and property on it – to
be built using the Bank’s money and the Buyers’ equity. Each Buyer pledges
only HIS part of the property (for instance, ONLY the apartment being
constructed for HIM). This lien is an inseparable part of the mortgage (loan)
contract each and every buyer signs. It is registered in the Registrar of
Mortgages and the Courts.
The Construction Company
- The construction companies use the advance of 25% to start the
construction of the residential property – to buy the land, lay the
foundations and start the skeleton. All the property belongs to the BUYERS and
is registered solely to their names. The Banks have a lien of the property, as
- When the advance-money is finished, the construction company notifies the
- The Buyers then approach the Bank for additional money to be taken from
the mortgage loans deposited at the Bank (=the money that the Bank lent the
- The Bank verifies that the construction is progressing according to
schedule and according to quality standards set in the construction contract.
- If everything is according to contract, the Bank releases the next tranche
(lot) of financing to the Buyers, who then forward it to the construction
- The funds that the Buyers borrowed from the Banks are released in a few
tranches according to the progress of the construction work. When the
construction is finished – the funds should be completely exhausted (=used).
When the Construction is Finished
- The construction company will have received 100% of the price agreed in
- The Buyers can move into the apartments.
- The Buyers go on repaying the mortgage loans to the Banks.
- As long as the mortgage loan is not fully paid – the lien on the property
in favour of the Bank remains. It is lifted (=cancelled) once the mortgage
loan and the interest and charges thereof has been fully repaid by the Buyers.
While the Mortgage Loan is Being Repaid…
- The Buyers can rent the apartment.
- The Buyers can live in the apartment.
- The Buyers can sell the apartment only with the agreement of the Bank – or
if they pre-pay the remaining balance of the mortgage loan to the Bank.
- The Banks can securitize the mortgage pool and sell units or mortgage
backed bonds to the public. This means that the Banks can sell to the public
pass through certificates - securities backed by an underlying pool of
mortgages of various maturities and interest rates. This way the Banks can
replenish their capital stock and re-enter the mortgage market.
About the Author
Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and
"After the Rain - How the West Lost the East". He is a columnist in "Central
Europe Review", United Press International (UPI) and ebookweb.org and the editor
of mental health and Central East Europe categories in The Open Directory,
Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor
to the Government of Macedonia.
His web site:
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Article Published/Sorted/Amended on Scopulus 2007-11-03 22:44:07 in Economic Articles