【summary】
A real estate secured loan is a loan in which money is borrowed using real estate such as land or a building as security.
If the borrower is unable to repay the loan, the lender sells the real estate collateral and recovers the loan amount from the proceeds. Because there is collateral, interest rates tend to be lower than with unsecured loans, making it easier to borrow large amounts.
However, a real estate secured loan does not mean a ``safe loan''. If you are unable to repay the loan, you may lose the property. Furthermore, if real estate prices fall, you may not be able to repay the loan in full even if you sell it.
Compared to subordinated loans, real estate-backed loans have collateral and are likely to be repaid in a higher priority. In corporate finance and real estate investment, they are often treated as senior loans.
This article provides a general explanation of how real estate secured loans work, and does not recommend any specific financial products, loan contracts, or real estate investments. Actual interest rates, loan amounts, collateral evaluations, repayment rankings, fees, and screening conditions vary depending on the financial institution and contract. Please check official documentation, contracts, financial institution instructions and professional advice before making any borrowing or investment decisions.
What is a real estate secured loan?
A real estate secured loan is a system in which you provide your home, land, condominium, apartment building, office building, etc. as collateral to a financial institution and receive a loan.
The image is as follows.
不動産
↓ 担保
金融機関
↓ 融資
借り手As long as the borrower makes the repayments as promised, the principal and interest will be repaid just like a regular loan.
The problem is when you can't pay it back. The financial institution sells the collateral real estate and collects the loan from the sale proceeds. In explaining the auction of collateralized real estate, the court also explains that a mortgage is a typical security interest that is used to receive preferential payment from the proceeds of the sale of collateralized real estate.
In other words, a real estate secured loan is ``a loan that makes it easier to borrow larger funds in exchange for giving up real estate.''
Why interest rates tend to be low
From a lender's perspective, secured loans are easier to recover than unsecured loans.
Of course, even with collateral, the risk is not zero. Things like real estate prices falling, sales taking longer, senior mortgages, and auction prices lower than expected can happen.
Still, there are better ways to recover than with unsecured loans. Therefore, real estate secured loans tend to have lower interest rates and larger loan amounts than unsecured loans.
| Loan types | Collection methods from the lender's perspective | Interest rate trends |
|---|---|---|
| Card loan | Mainly depends on the creditworthiness of the borrower | Can be expensive |
| Unsecured business loans | Focus on business profits and creditworthiness | Tends to be high |
| Real estate secured loan | There is a means of recovery through the sale of real estate | Tends to be lower |
However, just because the interest rate is low does not mean that the debt is light. It is a fairly heavy loan in that there is a possibility of losing the real estate pledged as collateral.
What is a mortgage?
In real estate secured loans, financial institutions often set the mortgage.
A mortgage is a right to receive preferential repayment from the sale proceeds of the mortgaged real estate when the borrower is unable to repay the debt.
In real estate registration, mortgages and other rights are recorded as rights other than ownership. The Ministry of Justice's explanation of real estate registration also states that the rights section records matters related to rights other than ownership, such as the establishment of mortgages.
What is important here is the order of mortgages.
When multiple mortgages are attached to the same property, the mortgage that is placed first often takes precedence. In other words, even for the same real estate secured loan, the risks vary considerably depending on whether it is the first-lien collateral or the second-lien collateral or higher.
Difference from mortgage loan
In a broad sense, a home loan is also a real estate secured loan.
However, the term ``real estate secured loan'' generally refers to a product borrowed for purposes other than purchasing a home, using real estate that you already own as collateral.
| Item | Home loan | Real estate secured loan |
|---|---|---|
| Main uses | Home purchase | Varies depending on the product, including business funds, refinancing, working capital, living funds, etc. |
| Collateral | House to purchase | Owned real estate, etc. |
| Interest rates | Can be low | Often higher than home loans |
| Loan amount | Depends on house price and income | Depends on collateral evaluation, income, and business situation |
| Examination | Income, repayment burden rate, property evaluation, etc. | Collateral evaluation, rights, repayment ability, etc. |
A home loan is a loan specifically designed for the purchase of a residential home.
While real estate secured loans have a broader range of uses, the usage, interest rates, collateral conditions, and fees vary greatly depending on the product. If you don't read the official product description, it's easy to misunderstand the terms and conditions.
merit
There are three main advantages to real estate secured loans.
| Benefits | Contents |
|---|---|
| Easier to borrow a large amount | Loan amount is easier to obtain than an unsecured loan because it can be backed by real estate value |
| Interest rates tend to be relatively low | Lender's collection risk decreases because there is collateral |
| Some products have a high degree of freedom in usage | Can be used for business funds, refinancing, working capital, etc. |
For business operators, the big advantage is that they can secure working capital and equipment funds using their real estate holdings.
However, just because it can be used freely does not mean that it can be used in any way. Some products are excluded from speculative funds and business funds. Conditions need to be confirmed with each financial institution.
Disadvantages
The biggest risk with real estate secured loans is the possibility of losing the property.
| Disadvantages | Contents |
|---|---|
| Risk of losing real estate | Collateral real estate may be disposed of if repayments become impossible |
| Examination takes time | Real estate evaluation, registration, and confirmation of rights are required |
| Expensive | Registration fees, administrative fees, appraisal fees, etc. may be incurred |
| Depends on real estate prices | Falling prices reduce collateral capacity |
| Even if the property is sold, there may be residual debt. | If the sale proceeds are less than the loan balance, there is a possibility that debt may remain. |
This is quite important.
Lenders feel more secure because there is collateral. However, from the perspective of the borrower, the collateral is his or her own assets. If you are unable to repay the debt, you may lose the real estate that is the basis of your life and business.
Difference between real estate secured loan and subordinated loan
Real estate secured loans and subordinated loans are completely different concepts.
A real estate secured loan is a loan that focuses on the presence or absence of collateral.
A subordinated loan is a loan that focuses on repayment ranking.
| Item | Real estate secured loan | Subordinated loan |
|---|---|---|
| Points to note | Is there collateral? | Is the repayment ranking low |
| Collateral | Real estate collateral | Often unsecured or with weak collateral |
| Repayment rank | likely to be high | low |
| Interest rates | tend to be low | tend to be high |
| Lender risk | Tends to be low | High |
| Positioning in corporate finance | Easy to be a senior loan | Easy to be similar to mezzanine/equity funds |
Real estate secured loans are often treated as senior loans in corporate finance and real estate investment. In other words, it is a priority loan with a high repayment priority.
Subordinated loans are closer to the other end of the spectrum. The repayment ranking is lower and the lender takes more risk. As a result, interest rates tend to rise.
Capital structure often seen in real estate investment
The following financing structures are sometimes used in real estate funds and real estate development.
不動産
↓
シニアローン（不動産担保ローン）
↓
メザニンローン
↓
出資金（エクイティ）Senior loans are in a position of preferential recovery from collateralized real estate.
Mezzanine loans are intermediate funds that have a lower repayment priority than senior loans.
Equity is the investment that takes the most risk. If things go well, the returns are high, but you are also susceptible to losses at the beginning.
Looking at this structure, it is easy to understand the difference between a real estate secured loan and a subordinated loan. Real estate secured loans are on the side of protection, while subordinated loans and equity are on the side of taking risks.
How to remember for beginners
If we simplify the funding to date, it looks like this:
不動産担保ローン
↓
普通融資
↓
普通社債
↓
劣後ローン
↓
劣後債
↓
AT1債
↓
株式Generally, the lower you go, the lower the repayment ranking, the higher the risk, and the higher the required return tends to be.
However, this is not a strict legal ranking. The actual treatment will vary depending on the ranking of collateral, contract details, bankruptcy procedures, and type of issuer.
For beginners, it's best to remember that a real estate secured loan is a loan with a high priority for which real estate is pledged, and a subordinated loan is a loan that has a lower repayment priority but is easier to pay at a higher interest rate.
summary
A real estate secured loan is a loan in which funds are borrowed using real estate as collateral.
The points to keep in mind are as follows.
- Use land or buildings as collateral
- Because there is collateral, interest rates tend to be lower than unsecured loans.
- Loan amount depends on collateral evaluation and repayment ability
- You may lose your property if you fail to repay the loan.
- Often treated as a senior loan in real estate investment and corporate finance
- The concept of collateral and repayment order is very different from subordinated loans.
A real estate secured loan is a loan that has a means of recovery for lenders, and a means for borrowers to raise large amounts of funds.
However, the flip side of this is the risk of losing real estate. Rather than just looking at low interest rates and large loan amounts, you want to check the repayment plan, collateral evaluation, fees, senior mortgages, and risk of remaining debt at the time of sale.
source
- Ministry of Justice “ABC of Real Estate Registration”
- Court "Collateral Real Estate Auction"
- e-Gov Law Search "Civil Law"
- Resona Bank “Real Estate Secured Loan/Free Loan (Secured Type)”
- Related article: What is a subordinated loan? Difference between a loan with a low repayment priority and a subordinated equity loan
- Related article: What is a subordinated equity loan? Why is it considered capital even though it is a loan