Borrowing less
Mortgage interest rates are rising rapidly: they have already almost tripled compared to October last year. Admittedly, the interest is still deductible, but at around 4% for a 20-year fixed interest rate, it has reached a level that entails a change in behaviour. The monthly costs for consumers are increasing rapidly due to rising interest rates and high inflation, and the borrowing capacity is decreasing. On an average home of just over 400,000 euros, that quickly amounts to tens of thousands of euros less borrowing capacity. That adds up. And of course the monthly costs are also increasing. In July and September, the ECB will increase the base rate to slow down the rampant inflation. And those are probably just the first steps. We have already seen that the capital market interest rate and therefore mortgage interest rate react quickly to this. It is therefore likely that the mortgage interest rate will continue to rise.
Higher costs
Inflation has not been as high as it is now since 1976. According to the CBS, we were 9.7% more expensive in March than a year earlier. This is still mainly due to the high energy prices. But it is already working through to higher prices for consumer goods. In other words: the consumer is confronted with higher costs on all sides. This means that the purchasing power of the consumer is decreasing. Traditionally, mortgage advice looks at the maximum amount someone can borrow. In our view, in addition to borrowing capacity, net capacity (Net Disposable Income, the NBI) and the associated financial behavior should also be taken into account, especially now. We call the smart combination of this into a modular consumer profile the Net Financial Behavior.
From saver to big spender
Until now, the net situation has not been a criterion in the advice and acceptance process for mortgages. However, the current dynamics on the housing and mortgage market give every reason to include Net Financial Behavior in the advice and acceptance. Net Financial Behavior says something about someone’s actual life. How much does someone have left at the end of the month? Is someone a big spender or does he or she live frugally? By looking at the spending pattern, you get a much more personal insight into someone’s financial situation. Another advantage is that this provides insight into what will happen to your finances in the future if something in your life changes. Suppose a child is born and the parents each go to work 4 days. That affects the income and the spending pattern. How much do they then have left to spend and how does their financial behavior change? If an advisor includes these types of issues in the mortgage advice, you can prevent consumers from getting stuck in the long term.
Responsible customization based on Net Financial Behavior
As a mortgage advisor, you can do even more with Net Financial Behavior. You can better motivate deviations from the mortgage standard and thus help certain groups better. Think, for example, of tenants in the private sector. They often pay a fortune in rent every month and yet in many cases they do not qualify for a mortgage based on their gross profile. While they may be able to bear the costs and risks of their own home – which are usually much lower than the rent they pay now – if you were to look at their Net Financial Behavior. Self-employed people and seniors would also be able to get a mortgage more easily if the application is well-substantiated with this insight. Then you will give responsible ‘net based’ advice and accept, based on customization. This will become even more relevant if the ‘funding appetite’ in the market decreases and lenders start accepting more strictly and cherry-picking. Lenders also benefit from assessing (potential) customers based on Net Financial Behavior, because that provides them with better files. Because you can create sharp future scenarios, the chance of default is smaller. The risk on the balance sheet is also reduced. In addition, it can also be interesting for lenders to get target groups such as expensive tenants, self-employed persons and seniors on the books – but then based on a well-founded analysis.
Why don’t we do it?
If Net Financial Behavior says so much more about someone than just gross income, why do we still neglect it so often? That is an interesting question. First of all, the use of the net situation is not (yet) mandatory. This is where the supervisory authority can play a possible role. It could take the lead in using the net situation as a criterion, in addition to the current framework of standards. In addition, you need technology to make net calculations. Thanks to the Payment Service Directive 2 (PSD2), account holders can also give other parties than their bank access to their payment data. With a smart analysis of this payment data, you can then arrive at an advanced consumer profile. This technology already exists. Such as BEYOND, special software that Yellowtail Conclusion has developed itself. The use of the net situation also requires a new or different way of thinking and advising. Such a change takes time. The early adopters among the advisors who are already working with net, see this as an excellent opportunity to gain a head start on the competition.
Now is the time
Now that the mortgage market is drying up (which accounts for at least a third of all mortgage transactions) and the housing market may also come under pressure, time will be freed up to invest in making mortgage advice net and to make Net Financial Behavior important. In this way, we ensure that everyone who buys a home does so in such a way that there is still money left to live comfortably on. With rising interest rates and increasing inflation, this is more crucial than ever. This is therefore the time to take steps and to make Net Financial Behavior an important part of advising on and accepting mortgages and other loans.
