Financial Stability Committee recommends further reducing the LTV limit to 90%

Financial Stability Committee recommends further reducing the LTV limit to 90%

The Financial Stability Committee (FSC) advises future Cabinets to continue the gradual reduction of the loan-to-value (LTV) limit for mortgage loans by 1 percentage point per year after 2018 to a level of 90%. A further gradual reduction of the maximum size of the loan relative to the collateral value is necessitated by the exceptionally high LTV ratios and mortgage indebtedness in the Netherlands, which pose a threat to financial stability. High LTV ratios make banks' and households' balance sheets vulnerable and go hand in hand with sharper fluctuations in house prices and the real economy. This is illustrated by the large number of households with an underwater mortgage loan. Although the current Cabinet's policy removes some of these risks, further reductions of the LTV limit are desirable, as was stated in the Cabinet's vision paper on the banking sector. The FSC emphasises that complementary policies are needed to accelerate the development of the rental market.


Rental market development crucialThe FSC not only analysed the benefits but also the broader economic and social costs of a lower LTV limit. At an LTV limit of 90%, most first-time buyers will have to save more or longer before being able to afford a home, which is expected to drive up demand for rental homes. 

Continued expansion of the non-subsidised rental sector is therefore vitally important. The measures taken by the Cabinet are making a positive contribution, but the increase in the supply of rental homes is unlikely to keep pace with the increase in demand. This calls for additional measures, for instance encouraging the liberalisation of the rental market by strengthening the policy providing for income-related rent and easing the provisions of tenancy law. Other measures include incentives to construct affordable new non-subsidised rental homes, for example the designation of additional regulation-free areas. 

Even further reduction to 80% undesirableThe FSC's advice to further reduce the LTV limit is in line with the recent recommendations of the IMF, the Financial Stability Board (FSB) and the Wijffels Commission. Although an LTV limit of 90% is still high internationally, the FSC believes that further reducing it to 80% as advocated by the IMF and the Wijffels Commission is undesirable. This would require young households to accumulate substantially higher additional savings, with the additional benefits in terms of financial stability diminishing. 

The Financial Stability CommitteeThe Financial Stability Committee met on Tuesday, 12 May 2015. 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) and the Dutch Ministry of the Interior and Kingdom Relations took part in the deliberations as external experts.