Will we repay our debts before retirement? Or did we already, but nobody noticed?

This paper uses a micro-simulation model to analyze the future housing debt position of specific groups of Dutch mortgage owners, such as starters and the self-employed, around the time of their future retirement. Our analysis shows that most household debt is in interest-only (IO) loans, which cease being fiscally deductible 30 years after origination— in most cases around the time of the mortgagor’s retirement. These loans are often combined with amortizing loans in more complex mortgage structures, which are also explored in this study. We identify two assets that, due to data limitations of existing sources, are currently understudied: voluntary repayments, and the value of the saving accounts pledged to saving/investment mortgages. Using a novel dataset from the Dutch Central Bank (DNB) enables us to make detailed observations that lead to several projections. These account for current and future non-housing wealth of mortgagors, and show that individual mortgages, even if not completely redeemed, are in general not problematic for the borrowers’ financial position around retirement. Costs will stay low if the IO part of debt is treated as a perpetuity, but might become burdensome, mostly to the self-employed, otherwise. Also, these debts are substantial at the macroeconomic level. In our most favorable simulations, one-third of the mortgage debt existing at the beginning of 2014 will not be repaid in the next three decades, possibly exacerbating the banks’ funding-gap problem.