Dutch mortgage loans have become a cornerstone investment for many institutional investors in recent years. With their attractive risk/return profile and long duration, they can act as an appealing alternative to other high-quality fixed-income products.
Yields on Dutch mortgages have been consistently attractive compared to assets such as government bonds or credit.
Note: The green bar indicates the 12-month historical yield range and the black dot the latest yield (October 2021). The net yield on Dutch mortgages is calculated taken into account representative management and origination fees and expected losses. Source: Dynamic Credit, Hypotheekbond, Bloomberg
Strong investor protection
A lender has full recourse to the assets of a borrower in the case of foreclosure, meaning all assets besides the property serving as collateral for the mortgage loan can be seized. Furthermore, if a borrower still has employment income, a part of the wage can be seized without court approval.
Mortgage loans of up to EUR 325 000, or EUR 344 500 in the case of energy-saving measures (updated annually), are eligible for a Dutch National Mortgage Guarantee (NHG). This provides a safety net for borrowers and lenders in the case of residual losses. NHG guarantees are backed indirectly by the Dutch State, entitling the underlying to a ‘Aaa’ credit rating by Moody’s and ‘AAA’ by Fitch Ratings and S&P.
The borrower pays an upfront fee for the guarantee. To ensure skin in the game, 10% of any losses is covered by the lender. The remainder is covered by the guarantee.
In the case that a borrower is unable to pay, the lender generally gives the borrower the opportunity to sell the property. If the borrower is unwilling to cooperate or fails to sell the property, it will be auctioned. No court approval is required prior to the auction, ensuring an efficient process.
Full recourse and an efficient legal system have resulted in a high payment morale. Note that long waiting lists in the public housing sector and the small unregulated rental sector are making these less attractive alternatives to many people compared to staying in their own home and paying their mortgage.
In the aftermath of the Great Financial Crisis, the asset class suffered its worst performance in recent history. Even though losses were minimal, underwriting standards have been tightened significantly.
This has improved the creditworthiness of Dutch mortgage loans. Since inception of our mortgage investment platform in 2014, cumulative realised losses have been well below 1bp.
COVID-19 did not impact the performance of Dutch mortgages. Payment holidays were introduced for borrowers with a temporary loss of income due to the lockdown measures. The usage of these payment holidays has been minimal and the outstanding payment holiday amounts were reduced greatly in 2020.
Estimated offer volumes over the past 12 months have been around EUR 145 billion, with around 75% in the 15 to 30-year fixed rate segment.
The share of longer fixed rate periods has grown significantly in recent years, benefiting investors with long-term liabilities.
Three ways to gain exposure
Investment exposure to Dutch mortgages can be obtained in different ways:
- Mandates are optimal for most investors as a tailor-made portfolio in terms of risk and duration segments can be built at attractive fee levels.
- Funds offer exposure to a slice of a mortgage portfolio, thereby limiting flexibility. Furthermore, fee levels are generally materially higher than for a mandate.
- Own white label products provide the most flexibility. Downsides are the long set-up period and higher costs.