How Going Dutch Could Reshape America's Mortgage Industry

There is a scene in the classic movie "Pulp Fiction," where John Travolta's character sums up a trip to Amsterdam by saying that things are similar there to the U.S., but he noticed "little differences," like the locals putting mayonnaise on their French fries. You may not like the idea of mayonnaise on your French fries, but you might like Dutch-style mortgages. Why? Because the interest rate goes down as your equity increases.

The 30-year fixed-rate mortgage has been the norm for home purchases in the United States since the Federal Housing Administration (FHA) and Fannie Mac came into being almost 100 years ago. Adjustable-rate mortgages that offered lower interest rates for shorter finance periods to increase consumer buying power were popular with commercial investors and gained popularity with traditional buyers until the crash of 2008.

The Dutch model is different. Because there was never any government-backed insurance for mortgage loans in the Netherlands, banks tend to look at mortgages from a more risk-based viewpoint when calculating interest rates and underwriting. As a borrower gains equity in their home and the mortgage balance decreases, it becomes increasingly less likely the borrower will default.

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As the risk goes down for the bank, the interest rate for the borrower decreases. It's a system that makes a lot of sense when you take a step back to think about it. It's also a system that has the potential to benefit a lot of U.S. borrowers, many of whom are struggling with 6% and 7% interest rates. However, these innovative mortgages are not available stateside.

While there is no doubt that many Americans might like a Dutch-style mortgage option with interest rates that go down with the mortgage balance, significant hurdles would need to be cleared before Dutch mortgages could work in America. First, there is no FHA in the Netherlands, which means it's unlikely that people could buy with 3% down because the government isn't insuring the loan. The down payment would likely be closer to 20%.

That means the Dutch mortgage, as appealing as it is, doesn't do much to alleviate Americans' challenge of affording the down payment and early-stage mortgage payments before they build up enough equity for the interest rates to go down. The fact that many mortgage lenders sell their loans on the secondary market could also be an issue.

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Some of the most sought-after loans on the secondary market are "seasoned loans" where there is significant buyer equity with enough of the loan balance remaining for whoever buys it to generate a solid yield. There would be a lot less interest in Dutch-style mortgages on the secondary market because buyers would be getting diminishing returns as the interest rates decline.

Perhaps the final issue with the Dutch-style mortgage is that they may exacerbate one of the issues facing the American housing market — people who locked in low-interest rate mortgages before the pandemic staying put instead of selling. You'd be a lot less inclined to sell your property if the interest rate were going progressively down as you paid the mortgage off. 

The Dutch option would work best for people who don't need the assistance, but it's hard to deny the potential appeal of Dutch-style mortgages, especially to highly qualified borrowers. There is no legal prohibition against these arrangements, which have recently become available in the U.K. All it would take is for an enterprising bank to offer Dutch-style mortgages in America and see what happens.

If Dutch-style mortgages did catch on,  American home buyers would have a more affordable option when it comes to financing. Considering it looks like there won't be a return to the days of 3% and 4% interest rates, that can only be a good thing. At a minimum, Dutch-style mortgages sound a lot more appealing than mayonnaise on French fries. 

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