Extra-Margins in ACM's Adjusted NMa ‘Mortgage-Rate-Calculation Method’

Abstract

We analyse the development since 2004 of our concept of extra-margins on Dutch mortgages (Dijkstra & Schinkel, 2012), based on funding cost estimations in ACM (2013), which are an update of those in NMa (2011). Neither costs related to increased mortgage-specific risks, nor the inclusion of Basel III related recapitalization costs completely explain the high margins on mortgages in the Netherlands. Extra-margins are lower on average than the 0.66 percentage points found using the method of Dijkstra & Schinkel (2012), but are still substantial at 0.38 on average over the period May 2009 to May 2013. A remarkable pattern remains, in which the extra-margin decreased during the NMa’s initial investigation, yet rose sharply again just after the NMa published its conclusion that margins had gone back to normal again. In the past 10 months, the ACM-adjusted extra-margins have reached even higher levels. It is at 0.96 percentage points on average in May 2013, the latest published observation by DNB to date. Margins on mortgages in the Netherlands appear to have remained high, especially since 2012, even when controlled for costs of Basel III and increases in credit risk.