Relaxing lending standards leads to more debt and higher house prices
Being able to borrow more for a house sounds like a solution to the tight housing market. However, this would only mean higher house prices and more debt, especially among first-time buyers. Using a new monitor, we answer five questions on why adjusting lending standards is not a good idea.
© ANP
1. But first, what are the current lending standards for home buyers?
Lending standards limit how much money you can borrow for a house. Generally, you cannot borrow more than 100% of the value of the house. This is known as the Loan-to-Value ratio (LTV). In addition, the bank looks at your income and current interest rates. This is known as the Loan-to-Income ratio (LTI). These rules are in place to prevent households from taking on too much debt and getting into difficulties.
De Nederlandsche Bank (DNB) and the Dutch Authority for the Financial Markets (AFM) are publishing a new annual monitor on mortgage lending standards and financial stability at the request of the Ministry of Finance. According to the monitor:
- House prices are up 21% since mid-2023. Incomes rose 14% during the same period.
- Almost 75% of houses were sold above the asking price in 2025.
- Total mortgage debt relative to the size of our economy is just under 80%, which is high compared to the euro area average (approx. 50%).
- First-time buyers often borrow the maximum amount: more than half have a mortgage of more than 90% of their home’s value.
- First-time buyers use 92% of their borrowing capacity on average, while existing home owners and those who are refinancing use 83%.
- The number of interest-only mortgage loans is falling, but these loans still constitute almost 40% of mortgage debt.
These figures show that many home buyers are financially vulnerable, especially first-time buyers. What would happen if they were allowed to borrow more?
2. Would it be wise to relax lending standards?
No. Allowing home buyers to borrow more money will ultimately lead to higher house prices and therefore risks for first-time buyers and financial institutions. This is because home buyers would be able to borrow more and would likely submit higher bids, which would only drive up house prices further. Debt would increase – first-time buyers in particular would have to borrow the maximum amount – and households would become more vulnerable in case of sudden unemployment, interest rate hikes or falling house prices. This would also mean a greater risk for banks and other financial institutions.
© DNB
3. How much risk do home owners currently face?
The position of home owners has become less vulnerable since lending standards were introduced in 2013. The maximum LTV has been lowered in steps from 106% to 100% and many properties are now worth more. As a result, fewer homes are ‘underwater’. Moreover, debt relative to income is lower than previously. However, Dutch households still have high mortgage debts compared to other countries. Moreover, they do not repay much of that debt.
4. Should the rules be stricter?
No. Stricter lending standards would lower the risks to the financial system, but they would make it even harder for first-time buyers to afford a home. However, an LTV limit lower than 100% would be sensible in the long run. The rental market would have to offer plenty of options, though, so that those just getting started can occupy affordable rental accommodations and save for a few years before buying a house.
5. What would be a better solution?
DNB and the AFM call for a comprehensive approach to problems on the housing market – not least in view of financial stability. This could involve phasing out tax breaks for owner-occupiers and building more houses. These measures can help limit the accumulation of debt, as well as reduce risks for households and financial institutions.
Monitor leennormen en financiële stabiliteit