If you’ve invested in equity loans in Costa Rica or have been researching into it, you may already have come across two of the significant ways that equity loans are secured: mortgages (hipoteca) and guarantee trusts (fideicomiso de garantía). You may even have heard opinions on the matter. We often hear “put everything in a trust!” as if that’s the only correct way to go for every loan.
Let’s first discuss the differences between mortgages and guarantee trusts.
Most people are already familiar with mortgages. With a mortgage, the property title remains in the debtor’s name, with the mortgage attached as an annex to the title (known as a gravamen in Costa Rica). The mortgage is canceled by the lender when the loan is repaid, and the gravamen is removed from the title. In case of default, the lender files for foreclosure proceedings at court, and the property is auctioned by a judge in a public auction.
With a guarantee trust, the property title is transferred to a third party, a SUGEF-approved trustee, as a guarantee for the loan. When the loan is repaid, the title is transferred back from the trustee to the debtor. In case of default, the property is auctioned by the trustee in a private auction.
Side By Side Comparison
Granting of mortgage: 1.65% of the amount of the mortgage. Cancelation: 0.65% of the amount of the mortgage.
Trustee fees (approx $500-1000/year) + 2 transfers of the property at 3.5% of the property fiscal value. Transfer is exempt only if lender is a bank.
The court proceeding is simple and straightforward. Depending on court involved, proceeding will take months.
Property is auctioned privately, typically at the trustee’s location. It involves setting a date and publishing a notice in a local paper.
If debtor does not voluntarily vacate, the same court will issue an order to the police to put lender in possession by force if necessary.
As there is no judicial authority involved, the trustee does not have the same legal authority as a judge, therefore an administrative proceeding called “administrative eviction” has be to be filed with the Ministry of Security, and if the proceeding is complex, they may declare themselves as incompetent — in which case the lender will have to start court auctions to have a judge issue an order.
The mortgage is regulated by law as well as the judicial foreclosure proceeding. The sole defense of the debtor is to demostrate that payment was made or amount claimed is not the correct one. Basically a proven bulletproof proceeding that normally is not challanged by debtor.
Mostly regulated by private agreements and therefore more chance that mistakes are made. Normally arbitration clauses are included and many debtors use it to delay foreclosure or challenge foreclosure once done.
Which One Is Better?
This isn’t an easy question to answer. As you can see, there are many factors involved. A general rule of thumb is to consider mortgages for home equity loans where the debtor resides in the home, as the added legal authority of the foreclosure via the court process will protect your interest.
Guarantee trusts are often preferred in project development, business, and construction loans. Also, if the lender is outside Costa Rica or multiple lenders (syndicated loan), it may be wise to consider structuring a guarantee trust with the terms that both sides can agree on.
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