Determinants of Outstanding Mortgage Loan to Value Ratios: Evidence from the Netherlands∗

This paper studies the determinants and behavior of outstanding mortgage loan to value (LTV) ratios for a panel data set of 8867 Dutch households over the period 1992-2005. We find that outstanding LTVs are driven by household characteristics, life-cycle effects and mortgage type characteristics. LTV declines with the time elapsed since mortgage commencement, but this decline is faster for socalled ‘repayment’ mortgages (such as ‘linear’ or ‘annuity’ mortgages) than for ‘non-repayment’ mortgages (such as ‘interest-only’ or ‘endowment’ mortgages). LTVs and loan to income ratios are significantly higher for ‘non-repayment’ mortgages -especially in recent yearsindicating that these mortgages may be riskier. A probit model with mortgage type as the dependent variable reveals that the recent proliferation of ‘non-repayment’ mortgages is driven by the tax advantages they confer and by tightening financing constraints due to declining affordability in the housing market. ∗Cunha is from Portuguese Catholic University, Porto, and gratefully acknowledges financial support from Fundacao para a Ciencia e Tecnologia. Lambrecht and Pawlina are from the Department of Accounting and Finance, Lancaster University, UK, and thank the ESRC (grant RES-062-23-0078) for financial support. Correspondence can be sent to [email protected].