Savings and mortgage interest rates continue to decline
Savings and mortgage interest rates at banks have been on the decline for some time now. Both rates dropped approximately half a percentage point over the past twelve months. In February 2014, Dutch households received an average of 1.37% interest on their readily redeemable savings, while paying 3.52% on average on newly contracted mortgage loans.
In February, Dutch households held some EUR 280 billion in readily redeemable savings, at an average interest rate of 1.37%. This savings interest rate has declined over the past two years (see chart), driven by factors including banks’ demand for funding, the supply of savings and the cost of other types of funding. The interest on tied-up savings deposits, in which Dutch households hold approximately EUR 50 billion, also declined. The rate of interest paid on savings tied up in February was 2.26% on average. About half of these savings were paid into time deposit accounts with a maturity of up to one year.
Mortgage interest rateand savings interest rate of Dutch banks (%)
In February, Dutch households held some EUR 540 billion in mortgage loans from banks, paying an average interest rate of 4.47% on the amount outstanding. The rate of interest on outstanding mortgage loans also declined, but to a much lesser degree than the interest on readily redeemable savings. This is because households often fix the interest rate on their mortgages for a longer term. The resulting difference between savings interest rates (which are often variable) and mortgage interest rates (which are generally fixed for a longer term) may make debt repayment an attractive option for households. Households have seen their savings shrink by approximately EUR 4 billion over the past twelve months, a highly exceptional development in the Netherlands. According to banks, part of the savings drawn down were used to make extra repayments.
Banks have also reduced the interest rate on new mortgage loans over the past two years, charging 3.52% on mortgage loans newly contracted in February. This reduction has virtually kept pace with the savings interest rate decline. The distance between the rate of interest on readily redeemable savings and the rate of interest on new mortgage loans has hardly changed, having amounted to two percentage points on average for two years now (see chart). Mortgage interest rates in the Netherlands are not determined solely by savings interest rates, given that banks depend in part on funding from professional parties in financial markets for their mortgage grants. In other words, the interest that banks are required to pay on those funds is also an important factor in setting mortgage interest rates.