Profit margins on mortgages have increased as banks must meet ever stricter requirements

Since the outbreak of the financial crisis, the ever stricter requirements imposed on banks to make them more crisis-proof have led to higher profit margins on mortgages. Banks have indicated that they are forced to increase margins on new mortgages considerably in order to improve their balance sheets.

This is one of the findings of a study carried out by the Netherlands Authority for Consumers and Markets (ACM), which is a new regulator after the Netherlands Competition Authority (NMa), the Netherlands Independent Post and Telecommunications Authority (OPTA) and the Netherlands Consumer Authority joined forces on April 1, 2013. The study was launched because several non-Dutch mortgage providers had left the Dutch market leaving Dutch consumers with fewer options. Governments and credit rating agencies demand that banks improve their balance sheets in order to become more crisis-proof. Banks use the higher profits on their mortgages to bolster their capital positions. Since the start of the financial crisis in 2008, the average profit margins on outstanding mortgages have increased 0.24 to 0.74 percentage points. For a consumer that took out a mortgage of, say, EUR 200,000 after the crisis, his gross monthly mortgage payments have risen by EUR 40 to 123.

Furthermore, ACM has observed a more cautious attitude among mortgage providers. Banks that are active in the Dutch mortgage market currently indicate they wish to be more cautious with regard to selling mortgages, and are therefore raising mortgage interest rates.

‘Consumers bear the costs of Dutch banks needing to improve their balance sheets in order to become more crisis-proof,’ says Chris Fonteijn, Chairman of the Board of ACM.

So far, no indications have been found about possible cartels in the mortgage market. The study revealed that hardly any new entrants have entered the market in recent years. ACM has found no indications that new players will be entering the market in the near future. A follow-up study by ACM should make clear what is needed to remove the current barriers to entry for non-Dutch banks and other mortgage providers to become active on the Dutch mortgage market.

Potential barriers to entry include the uncertainty in the market as a result of changing mortgage regulations, restrictions with regard to international capital flows, the levels of compliance costs, the levels of mortgage distribution costs, and the uncertainty in the Dutch housing market in general. The follow-up study into the barriers to entry fits with the ACM’s wider focus on services in the entire housing market chain, and with the ACM’s mission to promote opportunities and options for consumers and businesses.
Mr. Fonteijn adds: ‘One of the reasons for the current situation in the mortgage market is that hardly any new players enter this market, yet we do not completely understand why no one is entering or whether anything can be done about it. That is what we intend to find out more, because having new players enter the market may help solve the problems on the mortgage market, and, more broadly speaking, enhance competition in the banking sector.’