Buying a house depends mostly on financing. For this financing a buyer mostly approaches a bank, an insurance company or a pension fund. Whoever lends the money for the purchase of a house, grants a mortgage.
That means that the house acts as collateral to give the financer security that the money he has leant will be paid back. The law gives him the right of first priority in a claim on the profit of a public sale of the house (if the owner is in remiss in fulfilling his obligations), thus preceeding other creditors. The right of mortgage is granted by the owner. As soon as the right of mortgage is granted to the financier, they become the mortgagor. The house for which the mortgage has been given acts as collateral.
Types of mortgage
The differences between loans for mortgages is mainly in the method of repayment.
The most important forms are:
- The linear mortgage
With a linear mortgage you pay annually the same amount (repayment); the annual interest gradually decreases because the total amount becomes lower each year.
- The annuities mortgage
With an annuities mortgage you pay the same amount of interest plus repayment during the whole period of the mortgage; in the beginning you pay a lot of interest and less repayment, in the end you pay a lot of repayment and less interest.
These forms both have their upsides and downsides. It is wise to seek advice for the most attractive form for you, mainly in consideration of the possible deductions that can be made on loans and income tax.
Providing mortgage loan
Most financiers will mostly only give a mortgage if the borrower has a life insurance. Payment of interest and repayment is dependent on the income of the borrower. If the person dies, the income disappears, and the inheritor of the house will need to sell it because they can't pay the interest and repayments.
To avoid this a life insurance is required. Should the borrower die prematurely the payment of the mortgage can be (partly) repaid by this insurance. It is wise to seek advice about which life insurance policy is best for you. Specifically if partners buy a house together it is important who takes the insurance and who is the beneficiary.
It is best to arrange that the life insurance begins on the same date as the quotation for the mortgage, but in any case on the day that you accept the mortgage.
The mortgage law is part of the Dutch statutory law which includes a number of guarantees with which the financer can expect repayment of the loan. The strongest guarantee is the law permitting the financer to put the collateral up for public sale (auction) if the debtor does not fulfil his obligations. The financer can take priority in using the profit to pay off still open debt. Two other guarantees are the substitution and the lease clause.
Substitution means that a possible compensation insurance claim can be a pledge for the mortgagor (financer): the security in the form of the house can be replaced by a claim to the insurer (the insurance claim is collateral instead of the house).
This guarantee is important in case of fire or other such serious damage which means the value of the house as collateral has severely diminished or even become worthless. It is therefore stated In the mortgage deed that the buyer must insure the collateral (house) against fire and other dangers.
The mortgagor (the financer) has legal authorisation to have the mortgage deed contain a clause that the owner may not rent or lease the collateral without consent and that above all there may be no long term upfront payment of rent or lease. This authorisation stems from the fact that if the collateral needs to put to public sale such a situation will diminish its value considerably.
The notary makes the deed of conveyance and the mortgage deed. The owner of the house, the financer and the notary all sign the mortgage deed. The financer is usually represented by an employee of the notary office. If the spouse of the owner will also live in the house, they need to give agreement for the mortgage.
The mortgage law usually ends once the loan has been repaid in full. The notary ensures that the registration in the public register is removed. This takes place via a notarial deed of revocation (cancellation). The mortgagor (the financer) must give their agreement and power of attorney. If the mortgagor (financer) is a private person, then the house owner is wise to keep an eye on when the debt has been paid off and a deed of revocation can be made. Should the financer die then his inheritors do not need to be informed of the fact that the debt has been paid off but that the registration of the mortgage law has not yet officially been cancelled.