Dutch mortgages – grass roots investing in the Netherlands

Published on: 18 March 2024

The appeal of Dutch mortgages among pension fund investors has increased dramatically in recent years. According to the Dutch central bank (DNB), the portion of the mortgage market taken up by institutional investors including pension funds and insurers has increased from around €46 billion in 2012 to €163 billion in 2023. APG’s pension fund clients have also been investing more in the residential mortgage market. Currently APG has around EUR 5 billion invested in the asset class, but its clients are keen to further grow their exposure. Senior Portfolio Manager Kay Mennens and Portfolio Manager Arber Demaj highlight the main characteristics of the market and explain why, despite some setbacks in 2023, it will continue to attract pension fund investors.

In summary
• Dutch mortgages are long-term investments that are a good fit with the structure of pension fund liabilities.
• The defaults and losses in the asset class have been historically very low, supported by the solid infrastructure and the good payment morale in the Netherlands.
• Mortgage investments also offer opportunities to contribute to social and environmental goals.

Although Dutch mortgages technically fall within fixed income, they form a sufficiently different investment for APG to class them as a separate sub-asset class. “This demarcation also stems from discussions we've had with clients and their focus on the specific features of different asset classes”, explains Mennens. “The long investment horizon and more illiquid nature of mortgages offer diversification benefits compared to other credit and alternative credit investments, warranting treatment as a separate sub-asset class.”


Why are mortgage investments a good financial fit with the liabilities of a pension fund?

According to Demaj, pensions and mortgages are linked in the sense that they both follow a person’s life cycle. “Mortgages often involve a 30-year contract, making them a long-term product in investment terms. There are government bonds with similar duration, but mortgages have historically offered more attractive returns, while the associated credit risk is not significantly higher. This duration exposure is a good match with the liability structure of a pension fund. As mortgages are illiquid products, we buy to hold. If a mortgage holder decides to relocate after 10 years, the contract often continues, even if certain aspects need to be adjusted for the purchase of the new house.”


How did the mortgage market hold up in 2023, in a period of economic uncertainty and spiking interest rates?

“The outbreak of the war in Ukraine, energy shortage and related skyrocketing interest rates had a considerable impact on the mortgage market”, explains Mennens. “In a nutshell, our market has shrunk considerably. Existing buyers no longer opted to refinance, as they had locked in low rates earlier, often for 20-30 years. At the same time, the higher interest rates and the ongoing shortage of affordable housing raised the barriers for first-time buyers. As demand for mortgage investments from banks, insurance companies and pension funds has continued, it has resulted in increased competition, also impacting the outlook for returns. That said, our commitment to this market and our investment perspective are very long term, we can ride out these short-term effects and continue to build up our portfolio. The credit perspective is sound, and sentiment is stable. And now the outlook for interest rates is less volatile again, this should give the market new impetus.”


And how has performance been in the longer term?

Demaj: “Historically the Dutch mortgage market has proved to be very resilient. Defaults and losses have been low, even during financial crises or when house prices have fallen.  The Netherlands has a sound financial and social infrastructure, the payment mentality is good and there is a solid social security net. If people temporarily lose their jobs, they can often still pay their mortgage. There are also cultural aspects: Dutch borrowers tend to fix their interest rate for longer periods, giving them more certainty in terms of mortgage payments. The Netherlands also has a National Mortgage Guarantee (NHG) scheme, but for our clients, this is less interesting given the already low default rates. We don’t feel the need to pay up for this even lower level of credit risk and extra level of protection.”

Historically the Dutch mortgage market has proved to be very resilient

Aside from the financials, what makes Dutch mortgages attractive to our pension fund clients?

One important factor, according to Mennens, is that APG’s clients are always looking to invest more in the Netherlands. “The investment narrative for mortgages resonates with their participants – the pension money they are saving is being invested in the Netherlands to help Dutch people finance their homes. The product is very tangible; lots of people have mortgages – it’s something they can relate to. This also applies to us as investors. Every country has its own regime with specific features and regulations. In that sense, operating close to home is an advantage. Local knowledge is a key factor in being able to make informed investment decisions. And finally, mortgage investments also resonate with our pension fund clients’ responsible investing ambitions.”


So, how can mortgage investments help contribute to environmental and social goals?

“We started looking at the sustainability perspective back in 2018, when we started working with mortgage originator Vista”, continues Mennens. “They created a green mortgage label where a buyer could get a discount based on a property’s energy label. Today many similar structures exist, but together with our originators, we continue to look for new ways to incentivize people to increase the energy efficiency of their homes – insulation, solar panels and so on. Funding energy efficient new build homes is one thing, but improving the existing older housing stock probably makes a bigger environmental contribution.”


“There is also a social aspect, relating to how you treat people who are having difficulty making repayments. Although mortgage contracts give a clear right to enforce payment or repossess property, in practice we prefer to work with parties who take a more humane approach. By being proactive and trying to find a solution for financial hardship, for example, using budget coaches rather than forcing people out of their homes. Ultimately, it is also in our financial interests to solve these issues. There are also industry bodies and complaint mechanisms to support individuals, so the industry has a solid ‘social’ basis.”


How do you ensure the mortgages in your portfolio are of the highest quality?

Demaj: “APG does not have its own mortgage label. It currently uses mortgage originators Vista and MUNT. These platforms follow market developments and handle the origination process and mortgage-related administration. They are also the customer facing entity, enabling us to focus on the investment perspective. Quite a few pension funds use these platforms, and their products can differ, for example, in terms of the sustainability angle, which offers us additional flexibility and choice. At Vista we are an anchor investor – we were the first and are still the biggest investor on their platform which helps in strategic discussions. In that sense, one of the most important aspects of our work is handling this relationship and making sure our mortgage originators know the direction in which our pension fund clients want to move.”