Mortgage law

An awful lot of people have a mortgage these days. Hundreds of texts tell you how to get a mortgage and how much it will cost you. In addition to these important matters, it is also important to inform yourself about your rights and those of the bank. Here is a brief explanation of mortgage law.

Mortgagee and mortgagor

Our Civil Code has a section devoted to the right of mortgage. The most important rules regarding mortgages can be found in book 3. To begin with, a number of important key concepts are used in law regarding mortgages that require further explanation. Firstly, the person who applies for the mortgage, which is you in most cases, is confusingly called the mortgagor. The bank, from whom you actually borrow money, is called the mortgagee. This name will clarify the following example.

Example 1

Most people have to borrow money to buy a house. They generally do this at a bank. A bank will only lend you this money if it provides security for it. In this case it is the house. Mortgage also means first right of sale. So the bank takes out a mortgage on your house, you do not take out a mortgage on the bank. That is why you are the mortgagor and the bank is the mortgagee!

Limited right and absolute right

Now I must make it clear that mortgage is a limited right. This means that the right comes from a more comprehensive right, in our case the right of ownership. In our law we find two types of limited rights, namely enjoyment rights and security rights. A mortgage is a security right, because this right must ensure that the creditor (in our case the bank) can strengthen its position vis-à-vis the debtor (you as a client) by taking out a mortgage. Most mortgages are established on houses, so if you cannot pay off your mortgage, the bank always has access to your house! More explanation follows below. Now that we know that a mortgage is a limited right, we can also conclude that this mortgage right has an absolute effect. This means that the law not only applies between you and the bank, but also between you and others and between the bank and others. A simple example will clarify this.

Example 2

You are planning to buy a house. Unfortunately, you do not have enough money to do this and you therefore have to borrow money. You do this at a bank. As made clear above, you are the mortgagor and the bank is the mortgagee. The mortgage is placed on the house and you become responsible for the interest and repayments. A few years later (there has not yet been a full repayment), you sell the house to someone else. However, the mortgage right is absolute and remains on the house, it does not transfer to your new house (as a right!). The new resident therefore obtains a house with an established mortgage right. You can check whether this is the case in the public registers. However, the new resident is not responsible for the repayment of the mortgage, you as the mortgagor remain responsible!

Right of priority

An important feature of mortgage law is that it is a priority right. This means two things: the mortgagee (the bank) is a separatist and has the right of immediate execution. I will explain these concepts in more detail with two examples.

Example 3

A few days ago your company went bankrupt. Unfortunately, you had a mortgage on your business premises (part of your company) and you have various debts to a number of creditors. In a normal bankruptcy (without a mortgage), the proceeds from the sale of, for example, the company and other items are distributed among the creditors. In our case there is a priority right, mortgage. The bank as mortgagee is now a separatist and, according to Article 57 of the Bankruptcy Act, may exercise its right as if there were no bankruptcy. The bank may therefore sell your company (business premises) and does not have to share the proceeds (in principle) with other creditors!

Example 4

If the debtor (you as a client) fails to pay or repay, the creditor (the bank) may use its right of immediate execution. The bank is now authorized to sell your house, but in public. This can only be done under the watchful eye of a competent notary! The buyer of the house will also have to hand over the proceeds to the notary. This person gives the money to the bank. If the bank can get enough money from the proceeds of the house, any surplus goes to the mortgagor (you!). The bank also has priority over other creditors!

The legal establishment

A mortgage right is established on a registered property (real estate, including registered ships and aircraft) or on non-dependent rights such as leasehold. Our Civil Code indicates how a mortgage right should be established, Article 260 of Book 3. First of all, both parties (bank and client) must draw up a notarial deed. This must state that the mortgagor grants the mortgagee a mortgage on, for example, his or her house. The deed must state the amount for which the mortgage has been taken out, so that others can see exactly how much money, for example, a house is encumbered with! After drawing up the notarial deed, it must be registered in the public registers. This allows everyone to see that there has been a mortgage on the registered property in question since then.

In brief

  • We distinguish between a mortgagor and a mortgagee.
  • The right of mortgage is a limited right.
  • Mortgage is also an absolute right.
  • The mortgagee is a separatist.
  • Mortgagee has the right of immediate execution.
  • Establishment is done by drawing up a notarial deed and registration in the public registers.