High mortgage debt
The Dutch mortgage market is exceptional in a number of respects. For example, the total mortgage debt (EUR 650 billion) is one of the highest in the world, at 95% of GDP. In addition, at 102% the loan to value (LTV) or maximum mortgage loan relative to the value of the home is well above internationally customary levels of 80-90%. Last but not least, some 60% of the Dutch mortgage debt at the four large Dutch banks comprises interest-only mortgage loans, which is an unknown concept in most other countries.
Low credit losses
Despite the risks associated with these characteristics, the banks' mortgage portfolios proved to be reasonably resilient during the housing market crisis of 2008-2013. House prices dropped by 20% on average, while the number of transactions declined by 45%. Recent research by DNB revealed that the losses on the mortgage loan portfolios of the four largest Dutch banks increased only marginally, amounting to no more than 0.2% per year of total mortgages outstanding at these banks. Moreover, the banks had sufficient provisions to absorb these losses.
The fact that the Dutch mortgage portfolios managed to withstand this "real life" stress test relatively well can be explained by a number of factors. Firstly, demand structurally outstretches supply in the housing market. Due to strongly regulated building permit procedures, the number of newly built homes grows by a mere 1% every year, which is in pace with the annual increase in the number of households.
During the housing market crisis, the number of mortgage defaulters remained limited in the Netherlands, partly as a result of the Dutch social security system. In the event of unemployment, for example, homeowners can be granted extra time to find a new job or to sell the house against the best possible price. Partly as a result, the risk for the banks of mortgages going '"under water," i.e. the value of the home falling below the loan amount, is limited compared with many other countries.
Losses at the risk and expense of homeowners
Banks have ample legal room for manoeuvre in managing arrears when repossession is inevitable. For example, banks may decide to sell the home without court intervention. In most cases this is effected in consultation with the homeowner, preventing a public sale by auction and ensuring the proceeds are closer to the market value. As long as the value of the loan does not exceed the market value of the home, a forced sale does not necessarily have to result in losses. Contrary to the situation in the United States, where homeowners in many cases only have to hand in the keys to the bank if they can no longer afford payments, homeowners in the Netherlands remain at all times responsible for any loss incurred, both at an income and assets level.
In addition, in most cases the mortgage debt is also the only debt. Relatively speaking, Dutch residents do not have significant other debts such as personal loans or car loans.
Better overview of financial position
Although the study shows that the credit risk for banks is limited, there are risks involved for individual homeowners with high mortgage debts and interest-only mortgages. At the end of the loan term, interest-only mortgages must also be repaid. If homeowners do not manage to save the required amount in time, they must either sell the house or take out a new mortgage. After 30 years, the mortgage must in many cases be funded from a lower pension income, and mortgage interest tax relief is no longer possible. If no other assets are available, taking out a new mortgage may not be an option. In many cases, banks only have limited insight into their mortgage customers' financial position. In order to identify the risks for their customers, banks must gain a better overview of their customers' savings or investment products with other institutions, whether or not these are linked to the mortgage.
DNB's study revealed that about 6% of mortgagees are aged over 50 and have a partial or full interest-only mortgage that exceeds 80% of the value of their home. The total mortgage sum involved amounts to EUR 40 billion. Most of these mortgage loans will have to be repaid between 2025 and 2035. DNB therefore urges the banks to contact these high-risk customers in the years ahead in order to make them aware of the situation and help them develop an effective and fitting repayment strategy. A further restriction of the interest-only share in the total mortgage in the event of refinancing can also contribute to lower residual debt at the end of the term.
High LTV is the main risk factor
DNB used scenario analyses to gain insight in banks' potential losses on mortgage loans, both as a result of defaulters during the term and as a result of insufficient financial resources to repay the mortgage at the end of the term. These revealed that mortgage portfolios are most sensitive to conservative scenarios with low house prices and high LTVs. In the worst-case scenarios, cumulative losses on the current portfolio over a 30-year period could run up to 5%. This must be weighed against the banks' interest margin over the same period.
Further curtailment of mortgage interest tax relief and reduction of maximum LTV necessary
DNB concludes that the measures to curtail mortgage interest tax relief are beginning to take effect in banks' mortgage loan portfolios. Effective from 1 January 2013, mortgage interest for new mortgages may only be deducted for annuity-based and straight-line mortgages. In addition, the maximum tax relief percentage is being capped in stages for new and existing mortgages. In 2001, the maximum period to deduct mortgage interest was set at 30 years. Since 2011, the above measures have resulted in the percentage of 100% interest-only mortgages in the four largest Dutch banks' portfolios dropping by 1 percentage point per year from 27% to 23%, while the percentage of annuity-based and straight-line mortgages increased from 2 to 9% (see Figures).
Although the composition of the banks' mortgage loan portfolios is improving, the Dutch cyclical situation remains vulnerable due to the high level of mortgage debt. At previous occasions (e.g. in its autumn 2016 Financial Stability Report), DNB concluded that the current recovery of the housing market should be used to strengthen the housing market's resilience. Accelerated curtailment of mortgage interest tax relief, a further reduction of the maximum mortgage loan relative to the value of the home after 2018 and more affordable homes in the private rental market therefore continue to be essential.