Responsible mortgage lending
How far will you go to obtain a mortgage?
The mortgage for your home is probably the largest financial obligation you will have in your life. To make sure that you do not get into financial difficulties, a limit is set for the maximum amount you can borrow. This makes it less likely that you will not be able to make your monthly payments or be left with a residual debt when you sell. This benefits both you and your credit provider.
Nonetheless, we are seeing two trends that make it more likely that some households – and particularly first-time buyers – are taking out higher mortgages than should be considered responsible.
Conflicting policy goals
First of all, we have noticed a conflict between various policy goals. On the one hand, the government wants to encourage responsible lending while also making the housing market more sustainable and improving the position of first-time buyers by allowing exceptions to the lending standard.
Second, some households already have payment obligations that are not or not fully taken into account by lenders in the mortgage application when calculating the maximum amount that can be borrowed, such as student loans or private lease contracts, which you can take out for a car, a washing machine or even solar panels.
Both trends have our attention. In 2021, the AFM will research situations in which these trends pose risks for consumers and the implications thereof.
Financial vulnerability of first-time buyers under scrutiny
These two trends clearly affect first-time buyers. In the current economic situation, they are relatively vulnerable in financial terms. While the increase in house prices since 2014 has meant that the financial position of many owner-occupying households has improved, accessibility for first-time buyers has only become worse.
We have identified eight factors that play a part in the financial vulnerability of first-time buyers:
1. Maximum borrowing
Households are increasingly borrowing the maximum (or nearly the maximum) amount permitted with their level of income. This phenomenon is especially apparent among first-time buyers. Over half of the new mortgages taken out by first-time buyers involve a loan of more than 90% of the permitted maximum based on income.
2. Income insecurity
Many young people, and more than used to be the case, work on flexible or temporary employment contracts. This income insecurity for potential first-time buyers has increased as a result of the coronavirus crisis, making this group especially vulnerable. This can be seen from the large number of young people applying for unemployment benefit since the second half of March. Their employment history is often limited as well, which means that unemployment benefit will be paid for a relatively short period in most cases.
3. Something for a rainy day
Most young households do not have much cash in the bank that could soften the blow of a loss of income. This is most likely also the case for first-time buyers who need to borrow the maximum amount possible.
4. Unlucky in love
Around half of the households with first-time buyers are dual income. When the affordability of a mortgage depends on two incomes, there is a greater risk of loss of income, due to sickness for instance, and there is also the risk that the relationship will end. For mortgages backed by the National Mortgage Guarantee, around half of all cases where the mortgage was no longer affordable in 2017 were due to a relationship ending.
5. Starter loans
Many municipalities offer starter loans to help first-time buyers purchase their first home. These are mortgage loans that are specifically designed as an addition to a regular mortgage loan. If a maximum mortgage is not sufficient to purchase a property, a starter loan can bridge the gap. These loans are subject to favourable conditions, but they involve a larger loan than is considered responsible on the basis of the lending standard.
6. Sustainability improvements
When taking out a mortgage, more money can be borrowed for improving the sustainability of one’s home. The most common exception in practice is an exemption of €9,000 to install energy-saving measures. For a zero-energy house, the exemption is €25,000.
7. Student debt
First-time buyers are increasingly burdened with a student debt. Since the beginning of 2015, the number of students with a student debt has risen by 388,000 to 1.4 million in 2019. The average amount of student debt has also risen, from €12,400 in 2015 to €13,700 in 2019. Student debts are not always declared when taking out a mortgage.
8. Lease constructions
More and more first-time buyers also already have lease obligations. Whether it concerns a Swapfiets bicycle or a laptop, the market for private leases in the Netherlands has shown spectacular growth in the past six years. In 2019 for example, there were 188,000 outstanding car lease contracts, compared to 36,000 in 2015. A quarter of these lease customers are less than 35 years of age. Lease obligations are often not included when taking out a mortgage.
How can these two trends described above and the factors we have listed co-exist in practice, resulting in loans being granted that are completely out of step with the maximum borrowing considered to be responsible?