Dutch schemes drive down residential mortgage spreads

Spreads on long-term loans for Dutch residential mortgages have dropped significantly during the past years, as pension funds have rapidly increased their holdings of mortgages, according to Dynamic Credit.

The Dutch asset manager, focused on mortgage loans, noted that the interest margin gained by issuers of a 30-year loan had dropped in some cases to 16 basis points relative to 10-year loans.

It said, that in mid-2016, the spread still amounted to 48 to 62 basis points, depending on the mortgage’s risk profile.

The spread was the highest for mortgages guaranteed under the state-guaranteed mortgages (NHG) scheme, and the lowest for more risky loans without NHG guarantee and with a loan-to-value up to 100%.

It made clear that the spread for the most risk-bearing mortgages had dropped most, with the margin for 30-years mortgages with a 100% loan-to-value falling from 3.07% in March 2016 to 1.66% in October 2018.

During the past years, Dutch schemes and insurers have significantly increased their stake in residential mortgages – issued by six local providers - from less than €4bn in 2015 to at least €50bn.

According to statistics of regulator De Nederlandsche Bank, insurers had raised their exposure by €11.5bn between 2015 and 2017.

Schemes, in particular, prefer mortgages with long-term fixed interest rates to match with their long-term liabilities.

They like investments in residential mortgages as a diversifier and a reliable source of steady returns.

Jasper Koops, a portfolio manager at Dynamic Credit, said the spread is still sufficiently attractive to pension funds for continuing to extend their mortgages portfolio.

“Although the spreads have narrowed rapidly, they were very high and are still attractive compared to the alternatives,” he said.

Koops said he didn’t expect a further narrowing of spreads as a result of further mortgages investments by pension funds.

“Interest rates on mortgages have been creeping up as a result of higher capital market rates during the past months,” he said.

“Based on this development, we expect that the interest margin is about to bottom out.”

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