Turning mortgages upside down

24 November 2021

Many households have two incomes, often one much larger than the other. If that larger income falls away because of company reorganization financial worries are unfortunate but a normal reflex.

This article is brought to you by our partner Your Financials.

Two recent cases of making use of the spouse’s income enabling the families to adjust their mortgage to:

  • Reduce expenses, and
  • Provide expense stability for a long time,

thus enabling the couples to regroup and focus on efforts to increase income.

Self-employed income

A common factor in these cases was that the partner with the largest income received a severance payment and elected to become a self-employed entrepreneur. The severance payment plus unemployment benefits secured the possibility to bridge income whilst the businesses had time to grow. Most mortgage providers in the Netherlands nowadays have the possibility in include entrepreneurial income from starting businesses but many have restrictions in how much of that income is actually considered “structural”. These restrictions are not invented by the banks but by oversight authorities preventing bank overprovide debt. That said, some mortgage providers are “firmer believers than others”. The minimum number of years the business has to exist varies from 1-2 but is mostly 3. The second issue is that if the income grows from 10 to 50 to €80,000 in 3 years mortgage providers do not use the €80,000 but if there is no debt in the enterprise most likely around €47,000 (being the average). Finally you have to be able to demonstrate that income with accounts drawn up by your accountant. So in practice it will take at least a year, probably more, before a useful part of the entrepreneurial income is added to the spouse’s income to calculate how much debt you can structurally carry.

Trading places

No, I do not mean to lure you in a scammers’ scam so eloquently shown in the 1983 movie (which I recommend watching, again). When calculating debt capacity the smaller income is not included for 100%. So when spouse #1’s income is not immediately up to what it was, spouse #2’s income could be the largest at the moment. That can matter.

Assume spouse 1# had an income of 100 and spouse #2 had 60. Calculating the joint structural income was 100 + 90% of 60 makes 154. Now #1 cannot yet prove the average income. Then the joint structural income is €54,000. This is a reduction of 6 or 10%. When the roles are switched the joint income is €60,000.  

This may not look a convincing difference but it can be. Several mortgage providers are willing to consider calculating debt capacity on actual cost as long as it is lower than the existing debt expense. Several mortgage providers focus this on clients having reached their 10th anniversary before their state pension age and willing to commit to an interest fixed for 20 years.

In the two cases spouse #2 had a steady income, enough to carry the mortgage expense at a renewed (i.e. severely reduced) interest rate.

The combination of trading places, a spouse with a steady income and the ultra-low interest rate environment make it possible to add some financial relief to an already trying period in one’s professional life.

A bonus?

We see a lot of couples in our practice and often a spouse has a full time or part time employment in a care facility. Most care facility employees by default build up pension rights at Pensioenfonds Zorg en Welzijn. Part of that pension pot is invested in mortgage loans for employees of companies in the care sector. This not just hospitals but includes dentists, general practitioners, etc. etc. They have a very “long” agenda and are known in the industry to be amongst the very top competitive (i.e. lowest”) rates. You are eligible to that pot of mortgage money if you have built up a single Euro of pension rights with them.

One of the couples in this story did a triple whammy. Isn’t that wonderful?

Have a merry festive season!

With our monthly contributions to the Expat Centre Leiden Newsletter we aim to provide meaningful and relevant financial insights for a wide range of interests and practically useful first aid in financial situations you did not count on happening yet. We welcome any feedback, stirring our minds to discuss a topic of your choice.

The next few weeks are a mix of a year-end frenzy, moments to reflect and formulating intentions to do something better next year. We wish you much wisdom, plenty of laughter in the comforting presence of your dear ones and a fantastic start of 2022!