Financial Stability Committee examines LTV limit reduction after 2018

During its meeting on 4 November 2014, the Financial Stability Committee (FSC) discussed the main current risks to financial stability. The FSC also discussed the pros and cons of a reduction of the loan-to-value (LTV) limit on mortgage loans.

Current risks
The FSC exchanged views about current risks to financial stability in the Netherlands. The domestic risks have decreased; the housing market is making a cautious recovery and the position of banks has been further strengthened. The latter is also evidenced by the results from the ECB's comprehensive assessment, the large-scale examination of 130 systemic banks in the euro area. At the same time, the slow economic recovery and the low inflation in Europe pose a risk.

LTV limit on mortgage loans
Developments in the Dutch housing and mortgage market have a major influence on financial stability. The FSC discussed the pros and cons of a further reduction of the LTV limit after 2018. The LTV limit represents the maximum ratio permitted between the mortgage loan amount and the house value. The limit currently stands at 104% and will be lowered by 1 percentage point per year to 100% in 2018. The IMF, the Wijffels Commission and others have recently recommended a further reduction of the LTV limit after 2018.

The FSC recognises that a lower LTV limit has advantages because it would go hand-in-hand with less severe housing market fluctuations and would give households more time before they are under water on their mortgages. Such mortgages make it difficult for households to move or may cause serious financial problems in the event of unemployment or divorce. That is why a lower LTV limit can strengthen the stability of the financial sector and the economy. It is crucial, however, to also take into account the effects of recent reforms such as the reduction of the mortgage interest tax relief and the tax relief requirement determining that the loan must be fully repaid over the loan's maturity and on at least an annuity basis. These measures encourage repayment, which mitigates the risks to households. In addition, the statutory maximum borrowing capacity in relation to income (loan-to-income ratio) is important.

A reduction of the LTV limit also has downsides. Some first-time buyers will be restricted in becoming home owners, because they need to have more own funds. In particular in the transition phase, this will result in fewer house sales, greater demand for rented dwellings and higher rents, which has a negative effect on potential first-time buyers' capacity to save. A reduction of the LTV limit would therefore preferably have to be phased in.

The size of these effects is surrounded by uncertainty. A well-substantiated recommendation on the desired LTV policy after 2018 requires further research into young households' capacity to save and the possibilities to further develop the middle segment of the rental market. The FSC will further discuss this topic at its meeting in May 2015.

Other topics
In addition, the FSC discussed the recommendations of the Financial Stability Board in respect of the position and powers of the FSC. The FSC also selected the topics for its next meeting, in February 2015, which comprise cyber threats, OTC derivatives market reforms and the relationship between taxation and financial stability.

The Financial Stability Committee
The meeting of the Financial Stability Committee was held on Tuesday 4 November 2014. On this committee, representatives of De Nederlandsche Bank (DNB), the Netherlands Authority for the Financial Markets (AFM) and the Dutch Ministry of Finance meet at least twice a year to discuss developments relating to the stability of the Dutch financial system, under the chairmanship of the President of DNB. The Netherlands Bureau for Economic Policy Analysis (CPB) takes part in the meetings as an external expert.

A full account of the meeting of 4 November 2014 can be found here.

For questions, please contact DNB spokesman Ben Feiertag at telephone number +31 6 524 96 142.