Mortgage lenders’ behavior models require updating
In 2012 the Dutch Minister of Finance informed the Lower House of a number of measures concerning the interest rate policy of providers of mortgage credit.
One of the measures aims at making it easier for consumers to switch to a different mortgage lender. Mortgage lenders will be obliged to make concrete offers of new rates to consumers at least three months before the end of the fixed-rate period. This term is often somewhat shorter in practice, and as a result the consumer does not have enough time to obtain information about alternative rates from other mortgage lenders. Since the consumer may refuse the offer, for example if the interest rate has decreased, the mortgage lender is exposed to risk when it makes an offer. Extending the life of the customer’s option increases the risk the mortgage lender is exposed to. A risk surcharge payable by the customer will therefore apply to cover this. Industry organizations and individual banks have stated that this measure will result in higher mortgage rates. The ministry has indicated in a reply, however, that a longer interest rate refixing period will force mortgage lenders to make competitive offers, a factor that is expected to keep prices down.
In addition, providers of mortgage credit will be obliged to apply a single interest rate policy. This means that consumers with a similar risk profile must be offered the same interest rate regardless of whether the consumer concerned is extending a contract or entering into a new contract. With this measure, the minister is hoping to make the mortgage market clearer and more transparent for the consumer. In practice, the interest rate refixing period for new mortgage lenders is shorter than the three months proposed for those who refix the interest rate. The offer risk and risk surcharge for new customers is therefore lower for new customers than for existing customers. However, since no distinction may be made between existing and new customers, the risk surcharge for new customers will have to be increased.
Mortgage lenders will therefore have to adjust their pricing policy as a result of these changes. The surcharge for the offer risk will have to be based on an offer term that is an average of the term for new and existing customers. Making it easier to switch has a much greater impact, however, since a much larger percentage of a mortgage lender’s existing customers will consider a different lender at the end of the fixed-interest period. In addition, existing customers who decide to remain with the same lender will no longer automatically opt for the same fixed-interest period, since they will also consider other fixed-interest periods. Moreover, a mortgage lender will receive more requests for offers from new customers who are considering refinancing. Historical customer behavior therefore no longer appears to be representative for the future and the behavior models of mortgage lenders regarding the offer risk appear to be outdated. Mortgage lenders must therefore update their behavior models in order to take the offer risk into account in the correct manner and properly cover against this risk.