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Mortgage and Revolving Mortgage | Real-estate transactions in Japan

Study for Buy-Sell property
Category : Study for Buy-Sell property

If you take out a loan from a financial institution to purchase a property, you are always required a mortgage Teito-ken or Neteito-ken, agreed upon between you and the lender, both of who need to apply jointly for the registration to disclose third parties. The Teito-ken and Neteito-ken have differences in types of loans, determined in accordance with the purpose of borrowing.

What is Teito-ken?

Teito-ken 抵当権, equivariant to the word mortgage in English, is a right established between an obligor and obligee (a financial institution) so that the creditor can ensure the recovery of the loan. Teito-ken is generally established when borrowing money from a bank to purchase properties. For example, if you take out a housing loan from a bank, the bank takes the house as collateral, a Teito-ken, and you can keep living in the mortgaged house while repaying the loan. The same is true in the case of a buy-to-let loan, where it enables the borrower to repay the loan while managing the rental property to earn income.

Mortgage establishments

Taking out a loan from a bank on a secured-by-real-estate basis requires not only an agreement between the borrower and the bank but also the mortgage registration at the Legal Affairs Bureau, which is to be disclosed to third parties. The registration is usually carried out with a judicial scrivener, going through several processes that include screening and assessing the real estate to reach a contract. After fulfilling the loan repayment, the mortgage registration is to be canceled, usually conducted with a judicial scrivener as well.

Even if you need to take out loans continuously, several times, the registration/cancellation procedures are required at all such times, which may annoy you. If you take out a housing loan with a repayment period of 35 years, you will need to do both the registration/cancellation only once until the loan is fully repaid in that 35 years. However, suppose you have a loan contract repeatedly with a shorter period, 3 or 5 years. In that case, you will need to go through the same procedures every time required, which can be troublesome and costly in terms of the fees to pay for judicial scriveners. For those who want to cut down such expenses, another type of mortgage, “Neteito-ken,” will be an option.

Neteito-ken, another type of mortgage

Neteito-ken 根抵当権, or revolving mortgage is fundamentally the same as Teito-ken, a mortgage set up by a financial institution against a loan. However, Neteito-ken has a different form of loaning and allows the borrower to remortgage repeatedly by setting up one collateral. In this financing, the mortgage acts like an “axis,” where loaning and repaying can go around, and that is why the word Neteito-ken is “Revolving mortgage” in English.

In a revolving mortgage, a maximum loan (amount limit) is agreed with the financial institution. The borrower can take out loans repeatedly up to the specified limit without having the mortgage registered/canceled each time of loaning. For example, a revolving mortgage with a limit of 60 million yen allows the borrower to take out loans repeatedly up to 60 million yen (as long as the repayment is fulfilled each time), and the registration is required only once at the initial agreement with the two parties. For this reason, a revolving mortgage is an option for those taking out loans continuously, such as a company in need of funds to run a business. In the case of a personal housing loan, a regular mortgage is commonly set as collateral, but a revolving mortgage will also be an option for those who purchase a property in investment.

Registration procedure of Teito-ken and Neteito-ken

The below shows a basic, two-staged flow, from a housing loan agreement to the mortgage registration. The registry is required for both normal mortgages (Teito-ken) and revolving mortgages (Neteito-ken).

1) Apply for a loan with a financial institution
The borrower (obligor) signs up the following agreements with the financial institution (oblige)
– Loan agreement: 金銭消費貸借契約
– Mortgage agreement: 抵当権設定契約

2) Register the mortgage at the legal affairs bureau
The obligor and the obligee jointly register the mortgage.
What to prepare for the registration:
– Mortgage agreement: 抵当権設定契約書)
– Registration identification information (certificate of title): 登記識別情報(権利証)
– Seal certificate: 印鑑証明書
– Registered seal (Jitsu-in): 実印
– Identification (Individual Number Card, driver’s license, etc.): 本人確認書類(マイナンバーカード、運転免許証等)

One thing to note is that you need to priorly prepare some specific documents, such as a seal certificate (印鑑証明書) required in the Japanese registration system. Remember that the seal certificate is only issued for a registered seal, so you need to have your seal “Jitsu-in” registered beforehand. Depending on the property to purchase, the registry will require other documents to file, such as the property ownership transfer and the title registration of a newly-built housing.

What if the case of mortgage enforcement?

A mortgage is foreclosed when the obligor defaults. If a borrower becomes unable to repay the housing loan completely, the obligee, the financial institution, will auction the mortgaged house to recover the loan amount. The borrower cannot sell the house by themself to pay off the remaining loan.
Cancel the mortgage registration after the full repayment
When the borrower completes the loan repayment, the mortgage can be deleted from the registry at the Legal Affairs Bureau. If you are a homeowner who has fully repaid the loan and canceled the mortgage registration, you can handle the house without any restriction from the financial institution. You can keep living there, selling, letting it out, as you intend to. However, keep in mind that the registration is not automatically canceled when the loan is paid off. Be sure not to forget the cancellation procedure after the full repayment. Otherwise, the mortgage remaining in the registry will trouble you when you want to sell the property.

It is also necessary to remember that the revolving mortgage registration is hard to cancel. The credit cannot be extinguished at the point of full repayment due to its form of continuous mortgaging, and the right of Neteito-ken (revolving mortgage) remains unless both the obligor and creditor agree to the termination.

Check the Teito-ken Mortgage when purchasing real estate.

If you plan to purchase a property, be sure to find out whether the property has been mortgaged or not. The legal affairs office can provide you with this information. Remember, purchasing real estate with a mortgage can be a risk. If the creditor enforces the right, you may end up losing your ownership.

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