Concerns over stricter rules for interst-only mortgages

More and more banks are tightening their policies for interest-only mortgages, setting stricter rules to mitigate risks. Experts worry about unintended effects on the economy, and homeowners are concerned about suddenly being unable to afford their homes, Radar reported.

With an interest-only mortgage, the homeowner doesn’t repay the loan, or part of the loan, during its term, but only pays interest. The debt is repaid in a single lump sum at the end of the mortgage’s term, typically when the home is sold.

This results in lower monthly payments, but regulators like De Nederlandsche Bank (DNB) and the European Central Bank (ECB) have repeatedly warned about the risks of these loans. The loan is usually only repaid upon the sale of the home, which can cause problems if the home value has decreased, for example. People could also end up in trouble if their income drops after retirement, unemployment, or falling ill.

Several major Dutch banks are now taking measures to mitigate that risk, mostly affecting only new customers or people who adjust their interest-only mortgage.

Rabobank and its subsidiary Obvion are introducing stricter limits on May 11. For new mortgages, refinancings, or increases, customers can borrow a maximum of 30% of the home value on interest-only, with an absolute maximum of €150,000. For existing customers, nothing changes as long as they do not adjust their mortgage.

ASN Bank is also implementing tighter limits. Customers could previously borrow up to 50 percent of the home value on an interest-only basis. From May 11, that will be 30 percent. Existing customers will notice no change as long as their mortgage remain unchanged. The bank cites risk mitigation as the primary reason for the adjustment, partly at the urging of regulators.

ABN Amro and Florious are implementing their changes on June 1. Both will loan up to 30 percent of the home value on interest-only. They, too, won’t change anything for existing customers as long as their mortgages remain unchanged. But the two banks will also offer existing customers who want to refinance or increase their interest-only mortgages more flexibility. These customers can loan up to 50 percent of the home value interest-only.

ING is the only major bank not making any changes for the time being. The bank will continue to loan up to 50 percent of the home value on an interest-only basis. The bank did tell Radar that it is actively warning existing customers about the risks at the end of the term.

According to Radar, experts are worried about unintended consequences for the economy. For example, people with interest-only mortgages may avoid moving in order to keep their current terms, stalling the flow in the housing market. Homeowners may also be able to borrow less for renovations, with consequences for sustainability efforts and the construction sector.

According to the homeowners' association, VEH, around 2.5 million homeowners have interest-only mortgages. The VEH warns that many of these homeowners will get into trouble when they try to refinance the mortgage that they have paid without problems for years, and are suddenly faced with a higher monthly payment because the interest-only portion is smaller.

“Banks want to protect their balance sheets, but this must not come at the expense of consumer protection,” said Cindy Kremer of VEH. “People who can easily afford their mortgages get stuck because some banks leave little room for customization, and that undermines housing security.” The association urged banks to communicate more clearly about the changes they are making and allow for customization per customer.

The Ministry of Finance told Radar that it understands the concerns, but stressed that banks must ensure that they loan responsibly. “Because many people face a lower income after retirement, mortgage lenders must assess not only whether the mortgage is financially responsible now, but also after retirement,” the Ministry said. It added that many homeowners will lose their mortgage interest deduction in 2031 and the years thereafter, meaning that net mortgage costs will increase while their ability to pay them decreases.

“Mortgage providers and advisors must prioritize customer interests and treat their customers with care. They must continue to approach customers with interest-only mortgages to identify potential affordability risks at the end of the interest-only term and to provide customers with insight into their various options,” the Ministry said.