Vincent de Winter (47) from Hilversum is not sensitive to stress. Even though he bought a house in August, the housing market has changed rapidly since then and he cannot lose his old home: don’t panic. “But my savings are running out. This situation should not last longer than four months.”
De Winter used a so-called bridging mortgage to buy his new house. With this he borrowed the expected profit that his old house would yield – the surplus value – for the purchase of his new house. An appraiser determines that excess value.
In August, the expected profit on the house in which De Winter lives with his partner and two children was set at 200,000 euros. He took out a bridging loan for 170,000 euros. He used that money for the purchase and major renovation of his new house. He has now lowered the asking price of his existing home in Hilversum twice: if someone wants it for the current asking price, he will break even. Failure to do so will result in a financial gap.
People who buy early and sell late are at greater risk.
Since 2014, when house prices started to rise again after a dip due to the financial crisis, the bridging mortgage has proven to be a fairly stable means of using capital to buy a new home, says mortgage expert Marga Lankreijer-Kos of advisor Independer. But now that the housing market has cooled since last year, the question arises: is it wise to spend expected returns before they are received?
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In the past quarter, prices of the average owner-occupied home fell the fastest in nine years, according to figures from the NVM real estate agency last month. Particularly in the areas around Amsterdam and Haarlem, relatively sharp decreases can be seen, with an average of 9 to 10 percent on an annual basis. Both ING if Rabobank expect house prices to fall again this year and next.
Many people with an owner-occupied house will not be bothered by this cooling. They bought their house years ago and saw the value increase to such an extent that a small correction does not entail any problems. But those who bought at the peak – at the end of 2021 or the beginning of 2022, for example – and are now forced to sell, could get stuck. Just like who already spent the hoped-for surplus value.
Bridging mortgages are short-term loans, from a few months (for the purchase of existing homes) to two years (for new construction). This is a godsend for many ‘moving on’ in the housing market. Especially when the new house has to be renovated considerably, or with new construction: purchase contracts are often signed when no stone has yet been laid. It can then take years before the house is habitable.
Margin
Most mortgage lenders do not lend the full expected surplus value, but keep a margin. Usually it is 10 percent of the total value of the house. By way of illustration: anyone who expects to sell a house for 300,000 euros with 100,000 euros in equity will receive a bridging mortgage of 70,000 euros with such a margin on the total estimated home value. If the house has fallen in value two years later and in reality ‘only’ yields 250,000 euros, the seller is left with a gap of 20,000 euros.
The margins can differ per provider. Some providers are stricter and use 20 percent. But until recently, there were also providers who worked without a buffer. According to mortgage expert Lankreijer-Kos, 11 of the 49 providers have adjusted their margins since October – the majority went from a buffer of 0 or 1 percent to 10 percent or more. Currently, she says one provider who has the full surplus value borrows: Obvion, a subsidiary of Rabobank.
The bridging is an important instrument for moving up the housing market
Marga Lankreijer-Kos mortgage advisor Independer
Because many homes have risen sharply in price in recent years, bridging is an important instrument, says Lankreijer-Kos. It creates flow in the housing market because it enables homeowners to buy a new house and then leave another house behind. But as house prices fall, people who buy early and sell late are at greater risk.
In addition, according to NVM, the number of sales also decreased in the previous quarter. Not only do people risk getting a lower price for their old house, there is also a chance that it will be more difficult for them to lose that house – and therefore have double housing costs for longer, such as the De Winter family from Hilversum.
stress
It is difficult to say how many people are currently in trouble with such a bridging mortgage. Figures are not kept. Independer and advisor De Hypotheker both say they recognize the problem, but say they do not have the exact numbers. Various brokers also see stress among customers who already have a new home before their old home has been sold.
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According to Lankreijer-Kos, it is important to maintain a sufficient buffer with such a mortgage, sometimes more than the lender deems necessary. “I would advise myself to maintain a wider margin than 10 percent, especially now that house prices are falling. Otherwise you will quickly end up with the fried pears.” According to her, a bridging mortgage without a buffer is very risky.
“Also ask your appraiser to be realistic and estimate your home at its true value,” says Lankreijer-Kos. That advice is less obvious than it seems. Research by the Dutch Central Bank from 2019 showed that home appraisals at the time were often higher than what was actually paid.
Two options
If you are already in trouble, you have two options. One of them is asking the bank to close the financial gap by increasing the mortgage on the new house – if there is room, that is. Another option, says co-founder Hergen Dutrieux of mortgage advisor Viisi, is to sell the old house immediately, even if the new one is not yet habitable.
“You do have to have another house available to live in, for example by renting something. That can be annoying. But you do remove the risk that way,” says Dutrieux. He now sees the market turning. Homeowners are doing the exact opposite of a year ago: sell their own home first, then start looking for a new home.
It doesn’t help that the number of sales is currently also declining. Vincent de Winter from Hilversum also notices this. With what he now knows retroactively, he would rather have changed the order, reversed it, because “the housing market turned right around” when he bought his house. “But yeah. It’s always easy to talk in hindsight.”