Why do Dutch borrowers pay around 1% higher mortgage rates than Germans or French? This is a question many people buying a house in the Netherlands ask. Specially those with friends abroad and aware of the rates charged in the surrounding countries, so I analysed the topic and came up with some interesting conclusions:
Let’s start by clarifying how banks determine the mortgage rates they charge consumers:
It’s typically mix of savings deposits (the larger part) + capital markets funding (covered bonds or RMBS). This mix varies from country to country. For example German and Belgian banks are able to finance virtually all outstanding mortgage debt by retail savings (and the rest by issuing covered bonds), but in the Netherlands the amount of outstanding mortgages is nearly twice the amount of household savings deposits. It’s not that Dutch people save less relative to Germans or French, but a large proportion of their savings is channelled to their pensions (Netherlands have the larger pension funds in Europe and these PFs invest primarily in assets outside the Netherlands), leaving the banks more vulnerable and exposed to capital market’s funding (which is also more expensive than savings deposits). One may argue that financing mortgages with retail deposits poses a maturity mismatch risk for banks, since most deposits are redeemable at notice and mortgages last for 30 years. In fact 46% of German deposits are held in long-term deposits (compared to only 17% of Dutch retail saving deposits), so certain countries are more hedged than others. So determining the exact rate at which the bank funds itself is a difficult exercise, however a good “back of the envelope” proxy is the sum of: 1) EUR swap 5-10 year rates + 2) Bank CDS spreads.
Another important factor to take into account is that mortgages Interest rate expenses are tax deductible in the Netherlands, which means your NET cost ends up being similar to that of Germans or French. So the question shifts to: Why are GROSS costs higher and who benefits from this? Well, that is essentially a large subsidy of the Dutch Government to banks (who are the ultimate beneficiaries of the tax deductibility). To give an idea of sizes, the Dutch mortgage market was EUR 637 billion in 2013. If you assume the average mortgage rates are 3% (conservative estimate I´d say, since most people are stuck with mortgages they did in the period 2005-2010 when rates were much higher), and that the average person deducts 40% interest of its income, that equates to EUR 7,65 billion tax deductibility benefits (of which the large part goes to Dutch banks!).
Tax deductibility aside, let’s dig into other reasons why Dutch consumers pay higher gross mortgages rates than Germans, French, Belgium (and even Portuguese these days, believe it or not):
Higher concentration: A lot of the foreign lenders that entered the Dutch market in the past decade already left as they relied primarily on securitization and this dried up after the subprime (ELQ, DSB, GMAC, etc). As a consequence most of the market share went to the largest 3 banks, which now have around 70% of the market. It’s also important to add that concentration is more likely to occur in smaller countries such as Netherlands or Portugal than large ones such as Germany or France. Needless to say, the more concentrated the market, the less the need to be competitive, hence higher rates.
Higher deposit rates than elsewhere in Europe: Dutch people pay annually 1.2% taxes on their assets (Dutch government assumes you make 4% return on your assets and taxes it at 30%). Considering Dutch banks pay roughly 1% on deposits, this means that if you have 100,000 EUR in savings .. you’ll have 99,800 EUR the following year. Add-in 3% inflation and your purchasing power drops 3.2% every year! This leads to many people opting to hold their hard earned savings in non-cash deposit assets – such as pensions (which invest in financial assets, hence growing at higher rates than deposits), real estate, stocks, etc. Consequently banks are forced to offer more attractive deposit rates than German / French banks, which ultimately leads to higher funding costs and higher mortgage rates.
Legacy problems: The new entrants (ELQ, GMAC, DSB) forced the Big 3 to adopt a more aggressive business model not to lose market share, with a larger maturity mismatch (for example maturity of wholesale funding decreased sharply: from 9.4 years in 2002 to only 5.7 in 2007) and poorer underwriting standards – which led to low net interest margins (a good proxy for profitability of banks). In any case this margin has historically been low for Dutch banks, which suggests they have either too much spare capacity (high headcount costs) or that they’ve historically made poor investment decisions, which ultimately resulted (and still does) in consumers having to pay higher rates to compensate for this legacy problems and inefficiency.
Government bail-out restrictions: When the Dutch government bailed ING, ABN and SNS out, it imposed several restrictions on their lending ability, mortgage market share, etc. These banks made large losses (mostly on CRE) and were forced to charge higher mortgages rates to consumers in the subsequent years, in order to strengthen their balance sheets and comply with EU solvency ratios. Rabobank, the only bank who stood on its feet during the crisis, had no incentive to lower margins either (legitimately so). Only recently new entrants started to capitalize on the opportunity by offering lower rates. You may wonder why didn’t they start earlier – but I suppose the Dutch government did not allow new entrants (via imposing high entry costs) until these banks could stand again on their feet – to protect thousands of jobs
Higher cost of funding: Despite EUR interest swap rates falling significantly in the last 4-5 years, mortgage rates have not fallen accordingly. One of the reasons is that although German banks typically issue covered bonds to attract additional capital market funding, Dutch banks use unsecured bonds and RMBSs, which are more expensive sources of funding than covered bonds. Another reason has been attributed to the fact that Dutch bank’s CDS spreads have not returned to previous levels of 2006-2007. As you can see per graph below, post-crisis you can no longer compare swap rates with mortgage rates but you have to add CDS spreads (shaded area) to the swap rate as a proxy for cost of funding for Dutch banks
However I took a snapshot of the CDS spreads from the largest 3 Dutch banks and the 3 German banks with the lowest CDS spreads (DB not included as its CDS spreads are higher than any of the below 6 banks). As we can see since 2013 this differential has disappeared, so there’s no reason why Dutch borrowers pay higher rates than Germans on the basis of CDS spreads.
Conclusion: Dutch banks’ legacy problems (leading to higher funding costs), a dishonest tax deductibility benefit (mostly captured by banks at the expense of tax payers), a very high concentration and an archaic 1.2% tax on assets are the main factors why mortgage rates in the Netherlands are among the highest in Europe at the moment. Fortunately some start-ups and leaner banks (domestic and foreign) have spotted the opportunity and are now offering much better terms than mainstream banks. Munt Hypotheken, Voksbank, Dynamic Capital, Money You are some of the most competitive right now.
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