An Expert Explains: The difference between a General and Special Hypothec

Navigating through the jargon employed by banks when obtaining a loan can be a complicated affair, with new words like ‘hypothec’ leaving many a first-timer scratching their heads in confusion.

Today’s column by Marisa Said, who heads the Consumer and Microbusiness Finance Department at Bank of Valletta, continues a series of articles aimed at demystifying the world of credit.

Her previous An Expert Explains contributions have been on the sanction letter, the difference between secured and unsecured loans, and collateral.

Ms Said has over 30 years of experience in retail banking, most of which are directly related to mortgages, and is a key trainer in the area of home loans.

She explains:

A general hypothec is a legal right that a creditor has over all a debtor’s property or assets, both present and future.

This is done to secure the payment of a debt. This effectively means that if the debtor defaults on the debt, the creditor has the right to seize and sell any of the debtor’s assets to recover the amount owed.

Special hypothec on the other hand, refers to a creditor’s right on a particular asset, and therefore does not extend to the borrower’s other assets or property owned.

This means that the creditor only has the right to seize and sell the particular asset that serves as collateral if the debtor defaults on the debt.

The special hypothec attaches to the immovable regardless of who is the owner – however once the hypothecated immovable is transferred to a third party, the relative special hypothec remains in force for 10 years which start running from the day of the transfer in favour of the third party.

Whenever a debtor sells a property which is covered by a special hypothec to a third party buyer, the original debtor (seller) is legally obliged to inform the bank that the hypothecated property is being sold to a third party.

When a promise of sale is done, the notary will subsequently conduct the relevant searches, and the new buyer will be made aware whether the property being sold is affected by any hypothecs.

If the third-party buyer will need bank financing, the property in question cannot be covered by another hypothec, and the bank financing the facility will request the release of all hypothecs affecting the property.

An Expert Explains is a BusinessNow.mt initiative to improve economic financial literacy by inviting industry leaders to explain technical terms in a manner that can be understood by a general audience. If you would like to suggest a term or concept for our network of professionals to break down, or if you are an expert willing to contribute to this column, send us a message on our Facebook Page.