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New standards for the provision of mortgage loans to protect consumers

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The Netherlands Authority for the Financial Markets (AFM) today published new standards to prevent the provision of disproportionately large mortgage loans. The new assessment framework is necessary to protect consumers more effectively against the risks of excessive debts. These new standards will, among other things, ensure that the amount of the mortgage loan is in proportion to the purchase value of the residence. In addition, fewer exceptions will be permitted with respect to the existing income standard. The Ministry of Finance intends to incorporate the assessment framework in new rules that are expected to enter into effect at the start of 2011.

Necessity
In 2009, the AFM made proposals to amend the rules on mortgage loan provision. Investigation by the supervisor showed that the existing standard left too much leeway for the provision of excessive mortgage loans. For example, in a number of household categories the home owners can borrow so much that they are no longer able to pay  their minimum daily needs. There is also too great a risk of residual debt, as loans are often higher than the purchase value of the residence. This risk is increasing because the price development in the housing market has levelled off or is even negative, and unemployment is increasing, as well.

Furthermore,there has always been  the possibility – in exceptional cases  and with proper substantiation – of exceeding the standard of what may normally be borrowed, in order to loan a consumer more than would be realistic on the basis of his annual income. This possibility has, however, too often been applied without justification by the banks, which meant that the existing standard has led, in practice, to the provision of excessive mortgage loans.

An ongoing investigation into mortgage advice that commenced at the start of 2010 shows that banks are already providing excessive mortgage loans less often, partly as a result of the economic circumstances and the attention that the AFM has paid in recent years to the provision of mortgage loans. The new assessment framework will ensure that the current, more careful practice is retained for the long term as well, even if the economy improves in the future.

Debt standard
In addition to the stricter rules on the level of income, the amount of the mortgage loan in relation to the value of the residence will also be taken into account from now on. The mortgage loan may amount to at most 112 percent of the purchase value of the residence. In that connection, the part of the debt that is in excess of the purchase value has to be redeemed within 7 years or covered by accumulated assets. Until now, there was no maximum for the amount of the mortgage loan compared with the value of the residence.

The obligation to redeem the excess of the mortgage loan or to cover it with the accumulation of assets does not apply to mortgage loans that fall under the National Mortgage Guarantee (NHG). If the consumer already has disposable assets, this can also be used to cover the debt exceeding the value of the residence. In the case of reconstruction, the assessed value of the residence after the work has been carried out will apply as purchase value, as a result of which (part of the) improvement of the residence can continue to be financed.

Income standard
The AFM also proposed an adjustment to the current income standard. Better account will have to be taken of the composition and the budget of the household of the consumer who wishes to take out a mortgage loan. This will lead to a more just and sustainable policy at banks when providing mortgage loans, and will reduce the risk of residual debt. Moreover, the granting of a mortgage loan in excess of the income standard may only be recommended under strict conditions.

Supervision
The Financial Supervision Act (Wft) provides that irresponsible loans may not be granted. The Ministry of Finance will shortly incorporate the mortgage loan provision assessment framework in an Order in Council. As regards the proposal to make assessments on the basis of three household types, the industry will be afforded the opportunity to present an alternative (which will be assessed by the AFM). This alternative must be able to achieve the same goal within the context of limiting the risk for consumers. The assumption is that the new assessment framework will enter into effect at the start of 2011.

Urgent advice for consumers
The AFM urgently advises consumers to make a balanced assessment of the increased risks they run when concluding a mortgage loan that is higher that the value of their residence. Mortgage advisors and providers will, in future, have to take the income and the value of residence into account when providing advice regarding a mortgage loan. They must determine the maximum amount a consumer is allowed to borrow on the basis of the income and debt standard. The consumer should in any case ask himself if he is willing to bear the costs of that maximum mortgage loan.

The AFM promotes fairness and transparency within financial markets. We are the independent supervisory authority for the savings, lending, investment and insurance markets. The AFM promotes the conscientious provision of financial services to consumers and supervises the honest and efficient operation of the capital markets. Our aim is to improve consumers’ and the business sector’s confidence in the financial markets, both in the Netherlands and abroad. In performing this task the AFM contributes to the prosperity and economic reputation of the Netherlands.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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