My mortgage deed is completely illegible! What am I actually signing for?

Most people need a mortgage to buy a home. In the hustle and bustle of finding a house, signing a purchase contract, securing a bank loan, and arranging a move, reading that difficult mortgage deed is often overlooked. Yet, the contents of the mortgage deed are clear: the bank gains far-reaching powers if you can no longer make your payments. In this article, we'll explain what your mortgage deed actually says.

Mortgage law: how does it work again?

You borrowed money from your bank to pay for your new home. You must repay this loan to your bank, either in installments or as a lump sum at the end of the term. In return for the loan, the bank receives a security interest in your home. This mortgage entitles your bank to sell your home if you stop making payments and to collect the remaining loan amount from the proceeds of the sale.

Besides the bank, you can also borrow money from other lenders, such as family members or someone's own private limited company. For the sake of readability, each mortgage lender will be referred to as a 'bank'.

The basis for the mortgage deed is the law

Every mortgage deed includes a number of standard topics. By law, the bank may stipulate several additional powers in the mortgage deed, in addition to the standard power to auction in the event of default. In practice, every bank wants all these additional powers to be included in the deed. It doesn't matter whether you're a first-time buyer or a long-time, regular customer: the bank's default priority is maximum security! Therefore, there's little point in arguing with your bank about the content of your mortgage deed. The bank determines the content of the deed, and your notary is not permitted to deviate from it. Only if your notary notices an error will it be corrected in consultation with the bank. Many banks are now making efforts to make the text of the mortgage deed more understandable.

Depending on the type of collateral (existing home, commercial building, new construction project) and the nature of the financing (business or private), there are some variations in the provisions the bank wants to include in the mortgage deed. Foreign banks offering financing in the Netherlands usually want to include more literal provisions from Dutch law in their mortgage deed than a Dutch bank, which merely refers to the law.

Amounts in the mortgage deed: loan and security

The loan agreements are recorded in a notarial deed. The bank prefers this, because the deed from your notary has greater evidentiary value than the bank's offer you had already signed.

Your mortgage deed lists several amounts. The first one is usually the amount of your loan. As a customer (also known as a "borrower," "debtor," or "debtor"), you declare that you owe this amount to the bank. Next, you'll see an amount for which the bank wants to establish a mortgage security. This security amount is usually equal to the amount of your loan.

Increased enrollment

Sometimes it's agreed that the mortgage deed will include a higher security amount than the loan amount: an "increased registration." The mortgage is then established not only for your debt to the bank at the time the mortgage deed is signed, but also for any financing you may need later, such as a renovation loan. The idea behind this higher "registration" is that a new mortgage deed isn't required if you later want to borrow more money for a renovation, or if the costs of an already planned renovation turn out to be higher. The renovation costs must then be financed through the same bank. If you want to arrange an additional loan for the renovation through a different bank, a new mortgage deed is required.

Additional percentage for interest, fines and costs

When you enter the security amount, you'll see other amounts listed. The total security for the bank is increased by a percentage of that security amount. This is not an increased registration, but rather an additional security margin.

The bank requires this margin because it only auctions off your mortgage if you haven't paid for several months. First, you'll receive reminders, then they'll try to negotiate a payment plan, and only as a last resort will the bailiff show up. During this time, your obligation to pay the interest (and possibly principal) continues, so your arrears with the bank grow every month. This can add up considerably, as the loan terms authorize the bank to charge a penalty. The additional percentage for which the mortgage is registered is intended for "interest, penalties, and costs."

This means that the bank may deduct not only the (remaining) amount of your debt from the auction proceeds, but also your outstanding interest, the fine, and the administrative costs of reminders, bailiffs, and the like. This applies to the actual arrears and costs incurred, with the total amount in the deed indicating the maximum amount for which the auction proceeds will be transferred to the bank.

So be aware that the bank creates extensive rights through the mortgage to recover, in addition to the interest on arrears, any fines and other costs incurred during the period of non-payment!

A numerical example:

Loan amount (equal to mortgage amount) € 100,000.

The additional percentage for interest, fines, and costs is 40%, or €40,000. The total security amount is €140,000.

The bank wants to auction the assets, even though nothing has been repaid on the debt. The remaining debt is therefore €100,000.

The interest payment arrears amount to €10,000. In addition, the fine is €15,000, and the bank claims costs of €5,000.

In total, the bank may then take from the auction proceeds:

Outstanding debt €100,000 + interest, fines and costs €30,000 = total €130,000.

Bank mortgage

Sometimes the bank issues a "bank mortgage." The mortgage is then established not only for your debt to the bank at the time the mortgage deed is signed, but also for all your debts to the bank at the time the bank holds the auction. This is often used for business financing. A provision to be wary of! At an auction, the bank can reclaim your loan, but also, for example, a renovation loan taken out later, and the outstanding balance on your credit card with the bank! So, ask your notary whether the mortgage deed for your home qualifies as a "bank mortgage" if you own a business and want to take out business financing with the same bank as your home mortgage.

Provisions in the mortgage deed that restrict your use, such as a prohibition on renting

Your bank wants to recoup the loan amount, plus any arrears, penalties, and costs, from the proceeds of your house's auction. Therefore, your bank has a vested interest in keeping your home's value as high as possible. You have limited control over that value: it's determined by the housing market. However, your actions can certainly influence the value of your home. Therefore, the mortgage deed contains several clauses designed to ensure that you don't do anything to your home that would lower its value or prevent the bank from repaying the loan:

• The rental clause
• The non-change clause
• The non-removal clause
• The condition of taking into management by the bank and eviction
• Pledging of auxiliary items
• Pledging of the rights arising from the building insurance

Below you can read what these provisions mean.

Rental clause: prohibition on renting

Imagine you can rent out your home for a lot of money while living elsewhere for a small fee. You pay your bank the interest and principal payments neatly every month, and you even have money left over to make additional repayments. That seems like a good deal!

Your bank, however, doesn't like this at all. Tenants are well protected in our country. If tenants pay their rent regularly, they are usually difficult to evict. This can be very detrimental to your mortgage lender. Fewer buyers are found for a rented property than for a property available for private buyers to live in. Investors are willing to pay less for a rented property than buyers looking for a home themselves. So, if you run into financial difficulties and stop making payments, the bank, by auctioning your rented property, carries a greater risk that your house will yield less than necessary to repay your debt. Moreover, the tenants may not maintain the property as well as you would as the owner/occupier. Therefore, renting out is not permitted without the bank's permission. If you do rent out, the bank can evict the tenants if it goes to auction.

Clause of non-change

Before the bank grants a loan, your home is appraised. This tells the bank the value of the property for which the loan is being granted. Your mortgage deed states that you may not change the "furnishing or appearance" of your home without the bank's permission. "Furnishing" doesn't refer to furniture, carpeting, and curtains, but to the structural design and intended use. You're not allowed to convert a residential building into a store – let alone a permit from the municipality you would need. Of course, you can take care of normal maintenance, such as painting, repairing a leaky gutter, or replacing the roof if necessary. But for any extensions, you need the bank's permission. The risk for the bank is that you let Beun de Haas do your renovations without insurance. If a supporting wall accidentally collapses, your house will lose value without compensation. If you hire a reputable contractor with proper insurance for the renovation, your bank won't refuse permission: the house will generally be worth more after the renovation!

Clause of non-removal

If your house has been properly renovated, you're not supposed to demolish the improvements when an auction is announced. The bank will therefore stipulate in the mortgage deed that any improvements made to your house may not be removed. Ultimately, this is also in your best interest: a renovated house will fetch more, so as much of your debt as possible will be paid off with the auction proceeds.

Condition of taking into management by the bank and eviction

If you get into financial trouble, you'll not only stop paying your mortgage but also have no money left for home maintenance. The bank can, with court authorization, force you to vacate your home. Before the auction takes place, the bank wants the house to look habitable. By taking over management, the bank can arrange for things like mowing the lawn and replacing broken windows.

Condition of pledging of auxiliary items

At auction, a stripped-down house fetches less than a well-maintained one. Therefore, the bank also obtains a lien (through a pledge clause) on the movable items that normally belong to a house. Think, for example, of the boiler and the awning. These items are sold at the auction.

Lien clause on building insurance

The bank requires you to take out buildings insurance on your house, otherwise the loan will fall through. Fire damage will devalue your house or even make it uninhabitable. As the homeowner, you are entitled to the insurance payout and could use that money to go on vacation. However, the bank wants the insurance money to be used to repair the damage to the house. The lien on the insurance ensures that the bank can, if necessary, collect the money itself and order repairs to your house.

What happens if you do not comply with the terms of the mortgage deed?

Your mortgage bank doesn't check annually whether you're actually living in your home or whether the maintenance is up to par. As long as you pay as agreed, your bank won't interfere. The bank's primary interest is financial. But if you don't comply with the agreements regarding your home, your mortgage debt becomes due! The bank usually only discovers this when you stop paying. If it turns out you've rented out your home without permission, the bank will be more likely to proceed with an auction than if you've complied with the terms of the deed.

What is a family mortgage?

Anyone who wants to borrow money from the bank must meet strict requirements. Sometimes parents can offer a solution with a family mortgage.

With a family mortgage, you also borrow money to buy a home. Only, not from the bank, but from your parents. They charge interest on this: this way, your savings yield more than if they were held in a savings account. Just like with a regular mortgage, borrowing from the "family bank" may also offer a tax advantage.

Addition

A family mortgage can be a solution if the bank won't finance more than 100 percent of the home's value. Parents can borrow the amount needed for, for example, additional costs or renovations.

The bank does include the child's debt to their parents when calculating the amount the child is eligible to borrow. It's possible that the bank will still cancel the loan because the income isn't enough to cover both loans.

Agreement

Just like a bank mortgage, a family mortgage must be formalized in an agreement, which both parties must adhere to. The agreement stipulates, among other things, the interest and principal payments the child must make.

Mortgage interest deduction

To qualify for mortgage interest deduction, the interest rate cannot be significantly lower or higher than what a bank would charge for the same loan. The loan must therefore be comparable—in both interest rate and term—to a bank loan. If the agreement meets these and other conditions for mortgage interest deduction, the child can deduct the mortgage interest on their income tax return. A notary can verify that this agreement meets all legal requirements, and the Tax and Customs Administration can verify that the requested interest rate is sufficient.

Donate

Parents don't have to pay tax on the interest received. However, the loan falls under Box 3 (taxable income). They can also gift the amount the child pays annually in interest and principal. It's advisable to consider the annual tax-free amount parents are allowed to give to their children.

Partner

Lending to a son or daughter – if there's a community of property marriage – often also means lending to the son-in-law or daughter-in-law. They are jointly liable for the debt. If they're not married or have a prenuptial agreement, you can still stipulate that they're both jointly and severally liable. The bank does this as well. This increases the likelihood of the debt being repaid, even if the relationship breaks down.

Risk

A family mortgage is not without risk. It involves a large sum of money and a long term. Therefore, the parents must be able to afford the money and still have a safe buffer. It's also advisable to request the child's financial information. Also, consider what might happen in the event of unemployment or disability. For example, you could ask the child to take out life insurance or disability insurance.

Summary and tip

Your mortgage deed is full of provisions primarily in the interest of your mortgage bank. However, there's no point in trying to negotiate different arrangements with your bank to suit your specific situation. Mortgage security is standardized: all mortgage banks essentially have the same provisions in their mortgage deeds.

You can, however, ensure you fully understand what collateral your bank requires. Should your own home serve as collateral for your business financing? Is there no other option? Ask your notary to review your bank's offer before you sign it. This will prevent surprises!

If the children need some support, a family mortgage can provide a solution.

Would you like more advice on this topic? Contact us. An initial (phone) consultation is free. To schedule an in-office meeting or a video call, please call +31 (0)10 44 53 777. We look forward to seeing you.

This article is taken from 'Met Recht Geregeld' (www.metrechtgeregeld.nl), a product of FBN Juristen.

This article should not be considered legal advice. FBN Lawyers and MAES Civil-Law Notaries take the utmost care in the content of these articles, but accept no liability for any incompleteness or inaccuracy of an article, nor for any consequences thereof.