Competition intensifies and price differentiation increases in the Dutch residential mortgage loan market

The margin is equal to the agreed interest rate between the bank and borrower minus the 8-year swap rate and the estimated funding costs of banks. Mortgage loan rates are based on the Loan Level Database. This contains data up to the end of 2018. Recent margin figures were taken from the websites of the three largest banks.

Price differentiation by type of mortgage has increased

Since mid-2015, the interest rate on mortgage loans provided by banks depends on the type of mortgage loan (see Figure 1). Until early 2015, there was hardly any difference between interest rates on interest-only and annuity-based mortgage loans. It increased rapidly since then, to stand at 40 basis points by the end of 2016. Recently it fell back again to 14-20 basis points.

The higher interest rate on interest-only mortgages can be partly explained by the longer maturity of this type of loan: since annuity-based mortgage loans are repaid in monthly installments, their (average) maturity is shorter in practice. However, this cannot explain why differentiation occurs only from 2015 onwards.  But changing competitive conditions can. The share of non-banking providers in the mortgage loan market started to increase in 2015, boosting competition and squeezing mortgage loan margins. Non-bank providers mostly entered the annuity-based mortgage loan market, resulting in additional pressure on the margin for this type of mortgage loan. Moreover, competition in the interest-only loan segment is less fierce since this market mostly serves existing borrowers for whom switching to a new loan provider is more difficult than renewing their loan with their existing loan provider. The fact that margins on interest-only mortgage loans decrease again after 2018 may be linked to the decreasing stigma on this type of loan on the one hand and the increased attractiveness of this type of loan resulting from low interest rates on the other.

High margins on high-LTV loans

Banks have been taking the loan-to-value (LTV) into account in their mortgage loan pricing since 2013 (see Figure 2). The LTV is the ratio of the size of the loan to the value of the house for which the loan is granted. The higher the LTV, the higher the interest rate. As a result, the margin for banks on loans with a high LTV is higher than that on low-LTV loans.

The maximum margin for mortgage loans with a high LTV compared to mortgages with a low LTV stood at 75 basis points at the beginning of 2016.  According to market operators, higher loan losses and a higher capital requirement at banks and insurers for high-LTV loans can only account for a very small part of this difference.  The remaining difference may be explained by the fact that there is slightly less competition in the high-LTV segment,  due to the reluctance of some of the new entrants to provide mortgages in this segment.

Margins charged to self-employed borrowers have disappeared

Until 2015, self-employed borrowers paid higher interest rates than those with a permanent employment contract (see Figure 3). This difference has disappeared since then. Mortgage providers now have more confidence in the earning capacity of the self-employed, while the perceived security of a permanent contract has decreased. In addition, increased market competition and the growing number of self-employed may have contributed to the convergence of interest rates for both groups.