Netspar Brief 18: Problematic Debt after Retirement?
DNB, ECB, and the Dutch government have sharpened their focus on problematic debt in households. This Netspar Brief evaluates that phenomenon from an economic perspective and examines these debt problems in relation to the parameters established by regulators in the financial industry. The emphasis is on the affordability of mortgage debt after retirement. After retirement, households experience a drop in income. Older people with an owner-occupied house and an interest-free mortgage may, in addition, have to renegotiate the interest rate and term on their outstanding home debt. In many cases, they also lose their mortgage interest deduction on top of that. The means and ability of banks to address this will depend on the parameters established by regulators. Over the past 25 years, the number of mortgages held by seniors has increased. This has been caused not only by people cashing in on their home equity, but also by the introduction of interest-free loans in the past. The European Systemic Risk Board (ESRB) has identified these types of loans as a source of systemic risk to financial stability. This alerted banks and regulators to the need for confronting excess debt, one result of which has been tightened lending standards. In general, the affordability of mortgages for seniors in the Netherlands presents little cause for concern. However, about 5% to 10% of retired households with an interest-free mortgage exceed the affordability thresholds set by the National Institute for Family Finance Information (NIBUD). That same group, moreover, often has very limited financial resources and cannot easily move to a smaller home or start renting. Although decreasing the number of interest-free loans in circulation may be desirable from a macroprudential or regulatory perspective, the opinions of other policymakers can vary. This Netspar Brief argues that in cases where a family encounters difficulty in making its mortgage payments, extending the life of the existing interest-free mortgage in some form might be the best option.