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Tuesday, 13 November 2012

The diabolical dilemma of the Dutch housing market: cutting your losses or waiting and praying for better times?!

In the almost two years that I write this blog, I received a number of letters from readers. I consider this to be very flattering and I truly hope to have made a difference in some cases, albeit that the only thing I can do is giving some advice. Some of these letters I published on this blog and other letters I tried to answer as good and extensive as possible.

The vast majority of these letters was about the Dutch housing market and what I want to call ‘the diabolical dilemma’. It goes like this:

“We have a house for sale, because we moved somewhere else [or for different reasons]. We want to sell our house badly, but the current, forecasted sales price is (well) below the mortgage amount of €###,###. This means that we might get stuck with a residual debt of €##,###, which we can’t afford to have on top of the mortgage for our current house of €###,###.

In the meantime, we have double expenses from the mortgages on our current house and our former house. These are eating away all our savings. What should we do?”

That is indeed a diabolical dilemma: should you cut your losses and sell your house for a price that leaves you with a substantial residual debt that you need to refinance? Or should you wait (in vain) until the Dutch housing market improves, so you can sell your house for a better price?

With the latter option, you run the risk of running out of savings. Don’t underestimate this, as this might force you eventually to sell your second house for a real bad price or even might force you to foreclose on your house.

The answer to this dilemma depends on the time you can afford to wait with selling your second house.

Both possibilities have their advantages:

1.    If you sell your house at a much lower price than you hoped, you get stuck with a residual debt. The advantage is that you now know the height of your residual debt and you have certainty that your losses will not expand anymore. In the new government agreement, the current cabinet Rutte II promised that you can deduct the interest for this residual debt from your taxes for the next five years to come.

2.    If you keep your house and you can afford paying for double mortgages, you have the possibility that the Dutch housing market might improve again and you might sell your house for a better price.

In my opinion, either choice should start with a visit to your bank or to the agent that sold you the mortgage. Discuss your options with them. It is also in their interest that you choose a solution that keeps you financially healthy. A foreclosed house that is auctioned will almost certainly yield much less money than the current market value; even in this very bad housing market.

The second step that you could make is: make a budget, like the example budgets hereunder (MID = Mortgage Interest Deductability).

Take your current net income and deduct your fixed and variable expenses from it, except for the mortgages: food, utilities, clothes, the family car, monthly costs for household appliances and (basic) holidays, gasoline/diesel, children’s expenses and the small amount of fun & luxury expenses that everybody needs to live happily.

Look now at the amount of your salary and fixed perks you have left and deduct both mortgages from this amount. If you still have a positive amount left, you can safely choose for option two, if you don’t want to sell your house before better times might come.

However, if you have a negative amount left, you must take the amount of your savings and other reserves and divide this through the negative income you have left per month. This will disclose the number of months that you can maintain your current lifestyle and two mortgages.

Calculation example of a household budget, based on having two mortgages
Click to enlarge
After you created your own budget after this example, you must try to estimate the amount of residual debt that you get stuck with if you sell your house at this very moment. 

What can help, is when you figure out what the last successful sales of a house like yours yielded. You can do this by visiting the ‘kadaster’ (i.e. land registry; for your city, which keeps record of all sales prices, by visiting a realtor or just by asking around in the neighbourhood.

If you can estimate your residual debt, you make the same calculation on your budget, but now you deduct the amount of your current mortgage from your ‘remaining salary’ (see the aforementioned budget calculation), plus your residual debt divided by 60 (the number of months that you can still deduct the interest of your residual debt from your taxes), plus the interest payments that you have to make on this residual debt.

Calculation example of a household budget, based on having one mortgage and a €35,000 residual debt
Click to enlarge
What happens in this calculation is quite interesting: if you accept the residual debt in this 2nd example, you start with paying more money per month than when you keep both mortgages. However, after only 15 months (out of 60) you pay already less money for your residual debt than the €650 of your second mortgage in example 1.

Of course these calculations depend on the amount of your residual debt, the total amount of your savings (if any) and the amount of money that you have left per month after paying the mortgage on your current house.

Please remember, however, that when you pay back your residual debt in five years you are debt free at the end of this period.

There is a considerable chance that, when you stick with having two mortgages, the housing market will still not have improved in five years and even might have become worse, leaving you with a higher residual debt. At this time, your savings might be gone.

Considering this, might make the diabolical dilemma not so diabolical after all.

Please remain writing with your questions and suggestions.


  1. Thanks for your blog.

    What about buying a house in the Netherlands?

    Would you consider that option given the fact that the rental market is also expensive and the offer much smaller than the one for sale?

    For instance for the case of an expat with a forecast of (not less than) 8 years to live in the Netherlands.

    Thanks Again, please keep posting!

  2. Buying a house is very well possible at this moment, as houses are much cheaper than 6 years ago. Please remember that the sales price of the house is not the price that you have to pay for it.

    Especially houses that are for sale for a long time offer ample room for negotiating on the sales price. People got stuck with these houses and can be in a awkward financial situation. That is unfortunate for these sellers, but it is an opportunity for you.

    My most important tip: don't take such a high mortgage amount that you start underwater. It could very well be that the housing prices will drop further in the coming years and that could mean that your house could be much harder to sell in eight years.