Dutch watchdog warns of interest-only mortgage dangers, but panic unwarranted

Although interest-only mortgages are becoming less popular, they remain widespread in the Netherlands. Financial regulators consider this type of mortgage risky, but experts say most older homeowners have little reason to worry or repay their loans early, NU.nl reported.

More than half of the Dutch mortgage debt consists of interest-only loans, totaling nearly 900 billion euros, according to the Authority for the Financial Markets (AFM). Unlike annuity or linear mortgages, borrowers with interest-only loans pay only interest—not the principal. “This can lead to problems at the end of the term,” the AFM warned. Homeowners who retire or experience a change in employment may find themselves unable to repay or refinance their loans when the term end.

Banks are increasingly urging older borrowers to reconsider their mortgage structures. A 60-year-old homeowner with an interest-only loan expiring in ten years, for example, cannot assume they will be able to take out a new one.

The mortgage type is rare elsewhere in Europe, and the European Central Bank (ECB) has long pushed the Netherlands to phase it out. “The ECB views interest-only mortgages in the Netherlands as a risk and wants to reduce the risks for banks and their customers,” Sander Burgers, a housing market economist at ING, told NU.nl. However, the conditions have been tightened. Since 2013, new interest-only mortgages may only cover 50 percent of a property’s value and are no longer eligible for mortgage interest tax deductions.

Still, some in the industry say regulators are overstating the threat. “In reality, the problem has been largely created,” Michiel Meijer, commercial director at De Hypotheekshop, told the newspaper. “Interest-only mortgages have existed in the Netherlands for decades, but the increasing restrictions mainly affect people over 50.”

Meijer noted that many homeowners in this age group took out their mortgages under older rules. When they move or refinance, they face stricter conditions. He used himself as an example: “The interest-only portion of my mortgage is 20 percent of my home’s value. The chance that my home will drop in value enough to make repayment impossible is almost zero.”

Despite the low risk, Meijer said banks still send him repeated warnings. “They regularly tell me I should terminate my interest-only mortgage,” he said, adding that many customers also call De Hypotheekshop in panic after receiving similar messages.

Meijer urged lawmakers to prevent new policies from creating unnecessary difficulties. “This mortgage type is already being phased out naturally,” he said. “So avoid causing problems for hundreds of thousands of people over 55—don’t make them uncertain about their finances or unable to move.”