Quality Mortgage Advice 2024: Results of a 2023-2024 Exploration

Quality Mortgage Advice 2024
Results of an exploration in 2023 and 2024
October 2024
External report

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Contents
Summary 3

1. Scope and methodology of the exploration 4
   1.1 Objective of this exploration 4
   1.2 Methodology 4
   1.3 Scope 4
2. Results of the exploration 5
   2.1 The orientation phase 5
   2.2 The conversation with the client 6
   2.3 The role of the advisor 10

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Summary
The AFM has conducted an exploration into the quality of mortgage advice in the Netherlands. Previous studies (from 2007, 2010, and 2014) provided a market-wide picture of the state of mortgage advice quality in the Dutch market. In this exploration, however, we investigated what the risks might be for consumers regarding mortgage advice today.
This exploration marks the starting point for further AFM activities on this theme in the coming years.
The exploration reveals that the points of attention identified in previous studies are not yet adequately addressed in all files. The AFM therefore draws attention again to these earlier points of attention. Additionally, we draw attention to a number of new points of attention.
The most important results of the exploration are listed below. In Chapter 2, we delve deeper into these results.
The orientation phase

• It is important that the advisor reflects on more than just the maximum mortgage amount in the orientation conversation.
• Advisors can use the orientation phase to draw attention in advance to the topics that will come up later in the advice conversation, so that the client sits at the table prepared.
  The conversation with the client
• It is important that advisors ask sufficient questions about the client's financial position to be able to give appropriate advice on the mortgage amount.
• Questionnaires must not steer or limit clients (too much).
• It is important that the advisor asks critical follow-up questions where necessary regarding the answers the client gives. Especially when the advisor notices contradictions or doubts about an answer.
• It is crucial that advisors pay sufficient attention to the client's fiscal history and inform them correctly about it.
• The consequences of relationship termination are always an explicit and client-specific part of the advice conversation.
• Sustainability deserves sufficient attention in the advice.
  The role of the advisor
• It is important that advisors arrive at advice independently.
• The advisor is responsible for a personal, correct, concise, and understandable advice report.
• The advisor makes clear what the client can expect from aftercare.

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1. Scope and methodology of the exploration
   1.1 Objective of this exploration
   The objective of this exploration is to form a new image of the way advisors implement the statutory advice standard of 4:23 of the Financial Supervision Act (Wft) and the AFM's guidelines on mortgage advice. Good implementation and execution of the advice standard increases the protection of clients receiving mortgage advice, as they enter into a mortgage loan that fits their situation.
   The AFM considers it important that consumers can continuously rely on the fact that the mortgage advice they receive is in their interest.
   1.2 Methodology
   The AFM sent written questions to 36 enterprises and assessed a total of sixty mortgage files from these enterprises based on the statutory standard of 4:23 Wft and the AFM's guidelines on mortgage advice. Additionally, the AFM made eight visits, during which extensive discussions took place about the mortgage process and the approach of the advisors of the enterprises.
   Due to the exploratory nature of this research, we do not draw market-wide conclusions in this report. However, we share the observations that emerged repeatedly in the research.
   Behavioral experts from the AFM were also involved in the research; they looked at the quality of mortgage advice from the consumer's perspective. These behavioral experts gained insight into possible opportunities and risks in the advice process related to consumer behavior, based on various sources, including behavioral science literature, conversations with advisors, and advice reports. Here, they paid specific attention to people's natural tendencies and the context in which they find themselves during the advice process.
   1.3 Scope
   For the exploration, we proceeded from the standard of Article 4:23 Wft. In selecting the files, we chose exclusively movers and first-time buyers who take advice for the purchase of a home. We did not select porting advice. This was partly due to the stalled porting market caused by rising interest rates during the research period.
   In the exploration, we included all segments of the market: (i) providers with their own advice channel, (ii) the independent intermediary, and (iii) mortgage chains. The file research was not risk-guided, meaning that we randomly selected an equal number of files from each of these segments.

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2. Results of the exploration
2.1 The orientation phase
The orientation phase plays an important role for clients in the search for a home. There they hear how much they can borrow at maximum. With that amount as an anchor point, the house search begins. The advisor must ensure that the client leaves this conversation well-informed. Regarding the orientation phase, the AFM has the following points of attention:
What are the AFM's observations?
The exploration shows that the orientation phase plays an important role in the house search. From the answers to the information request and from the visits to enterprises, it appears that the client's focus during this phase lies mainly on the question of how much they can borrow at maximum according to the borrowing norms based on income. The orientation conversation or an online calculator with which the consumer can calculate the maximum amount to be borrowed, thus provides guidance for a client who often has to decide quickly in the current housing market to be able to buy a house at all. However, it is not always reflected upon whether what the client could theoretically borrow according to the borrowing norms actually fits their personal situation. This usually only comes up in the second conversation – after the client has signed a purchase agreement. What is the risk? The risk of not reflecting on the client's personal situation in the orientation conversation is that it may only become apparent after signing the purchase agreement that the housing costs associated with the mortgage amount do not fit the client's personal situation, for example, if the client has higher expenses. The maximum borrowing amount does not take expenses into account. Because clients rarely waive the purchase on their own initiative, they may take on excessive financial risks. The client also risks being unable to back out of the purchase. After all, if the client has bought the house and the mortgage amount is justified according to the borrowing norms, it is generally not possible to back out of the purchase based on the financing condition. What does the AFM expect from the advisor? Communicating the maximum mortgage in an orientation conversation or online calculator can strongly influence people, as this amount serves as a reference point when determining the budget and house choice. People are strongly inclined to stick to such reference amounts. To prevent this situation, it is important that the advisor makes it clear during the orientation conversation that a suitable loan does not necessarily correspond to the maximum borrowing amount. The client's personal situation also influences this. Therefore, it would be good if the advisor checks whether the maximum borrowing amount aligns with the client's situation and asks what the client would maximally like to spend on housing costs. It would also be good to provide the option in a calculator to calculate the mortgage amount based on the net monthly costs the consumer wants and can pay. It is important that the advisor reflects on more than just the maximum mortgage amount in the orientation conversation.

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What are the AFM's observations?
During the exploration, we saw that some advisors use the orientation phase to prepare the client for the further advice conversation. We consider this a good practice.
What does the AFM expect from the advisor?
An advisor can add value by reflecting in the orientation phase as much as possible on the client's specific situation and having the client think in advance about topics that will come up during the advice process. The advisor can, for example, already inform the client about the process and advise them to think about topics that will come up later, for example, regarding different repayment forms, fixed interest rate periods, or risks such as death and disability. In this way, the client is already aware of the relevance and existence of risk insurance at the start of the advice process. This prevents the client from being surprised when the advisor asks about different life events and risk tolerance. The client is also aware of which choices, which will influence their financial household for years, they have to make and which choices are most relevant. To limit the amount of information, it is important to dose the information and time it well, for example, by sending a separate email after the orientation conversation. Because the client is better prepared, these topics do not hit them as hard during the advice conversation. This leaves more time to reflect on the most relevant points that specifically apply to the client.
2.2 The conversation with the client
In the conversation with the client, the advisor gathers sufficient information and asks follow-up questions where necessary to form a good picture of the client's situation. Regarding the conversation with the client, the AFM has the following points of attention:
What are the AFM's observations?
The file research shows that the advisor does not always adequately inquire about the client's financial position. Although inventorying matters such as income data and additional provisions generally goes well, not enough attention is always paid to the spending pattern and savings behavior. Compared to the 2014 study, we see that advisors ask more often if there are special expenses, but they do not always follow up sufficiently on this. The conversations also show that advisors reflect to varying degrees on the spending pattern or expected changes in this pattern. Furthermore, the file research shows that advisors sometimes do not gather enough information about whether the client can handle fluctuations in monthly costs. The AFM has also seen this with clients whose interest rate is fixed for a relatively short period, which is exactly when it is extra important. Furthermore, we see that not all advisors point out to their clients all relevant aspects in the cost picture that may change due to the purchase of the new home. Advisors can use the orientation phase to reflect in advance on the topics that will come up later in the advice conversation, so that the client sits at the table prepared. It is important that advisors ask sufficient questions about the client's financial position to be able to give appropriate advice on the mortgage amount.

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What risks does the AFM see?
The risk of not asking enough questions or not including the spending pattern and savings behavior in the advice is that the client may face unaffordable housing costs. The spending pattern and savings behavior are indeed of great influence on the affordability of the monthly housing costs. Even when no account is taken of reasonably foreseeable changes in the spending pattern, the housing costs can become unaffordable during the term. What does the AFM expect from the advisor? It is important that advisors ask sufficient questions about the client's financial position to be able to give appropriate advice on the mortgage amount. To ensure that the financial position is mapped sufficiently, it is primarily important that the advisor, in addition to income data, also gathers information about the client's spending pattern and savings behavior. Because people often have a poor overview of their spending pattern and savings behavior, it is important that the advisor guides them in this. For example, by pointing them to existing tools such as budget overviews in payment apps or the Nibud questionnaire 'Personal Budget Advice'. It can also help to have clients look at how their savings balance has grown over the past years to map a realistic monthly savings amount. Sometimes people overestimate how much they set aside monthly, for example, because they also withdraw money from the savings account throughout the year. Secondly, the advisor must map reasonably foreseeable changes in income and spending pattern. Changes in income and spending pattern can be caused by a changing living situation (think of HOA fees, maintenance costs, energy costs, taxes, ground rent, etc.) or by planned future plans (working less, (earlier) stopping work, desire for children, etc.). Generally, people are inclined to assume the current situation and do not anticipate or only partially anticipate possible changes. Therefore, it is important that the advisor points this out to them and concretizes what the consequences could be for the client's future financial position and thus for affordable housing costs. The AFM already paid attention to this topic in the 2014 study and draws attention again that advisors must include the spending pattern and savings behavior in the advice. What are the AFM's observations? The exploration shows that many advisors use standardized questionnaires to create a client profile. In these questionnaires, questions are often asked in general terms about the financial position, knowledge and experience, housing history, objectives, and risk tolerance. For example, different questionnaires ask how clients generally view (financial) risks. What risks does the AFM see? There are pros and cons to using questionnaires. One of the advantages is that questionnaires can contribute to better preparation for the advice conversation for both client and advisor. Possible disadvantages are that standardized questionnaires steer clients too much towards certain
answer options, that they limit the chosen options, or that they do not give a realistic representation of the associated trade-offs. Specifically regarding asking about the client's risk tolerance with questionnaires, it is known that people's risk tolerance varies greatly per topic. General questions that are not tailored to the client's specific situation will therefore yield little valuable insight and can lead to inappropriate advice. Questionnaires must not steer or limit clients (too much).

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What does the AFM expect from the advisor?
Following the 2010 study regarding the use of questionnaires, the AFM already drew attention to the way questionnaires are used. In this report, we want to bring this point to attention again. We expect advisors to be alert to the risks that the use of questionnaires entails. This means primarily that they check the questionnaires used for questions that already steer the client towards a certain answer and for questions with too limited answer options. Regarding too limited answer options, it is important, for example, to take into account overly general statements like "I always want as much security as possible." These statements provide little relevant insight into the client's risk tolerance regarding the risks to be discussed. Secondly, this means that the questionnaires are used only as a starting point for the advice conversation and the advisor asks follow-up questions where necessary. It is particularly important here to test whether the clients understand the questions well, to verify the client's given answers, and to uncover any missing trade-offs. What are the AFM's observations? In the file research, we saw contradictions in the gathered information. We also noticed that advisors do not always ask sufficient follow-up questions on the client's answers, for example, to clarify information. In these cases, the advisor failed to ask follow-up questions and clarify the information. We saw these contradictions in different parts of the client profile, for example, in the objectives and in the client's risk tolerance. For example, we saw that a client states they do not want to insure against the risk of death, but at the same time wants to leave the partner well-provided for, while this is not possible based on the client's existing provisions. Furthermore, we noted contradictions in the gathered information about the client's financial position. It happens that clients state they are able to save significantly on their spending pattern when life events occur, while the gathered information shows that the savings capacity is very limited. What risks does the AFM see? Due to both conscious and unconscious factors, there is a risk that clients do not always report accurately on their financial position. Shame, excessive optimism, opportunism, and insufficient knowledge of their own household budget can be causes. As we discussed in the paragraph on questionnaires, it is also possible that clients report incompletely or inaccurately about their objectives and risk tolerance, which can lead to contradictions regarding these topics. When advisors fail to ask follow-up questions on contradictions, they may have gathered incorrect or incomplete information, thereby failing to form a good client profile. What does the AFM expect from the advisor? To prevent this, the advisor signals these contradictions and asks follow-up questions to obtain a clear picture. This may bring new information to light with which contradictions can be clarified. In
the mentioned example regarding the risk of death, an advisor can explain that the client's wishes are incompatible and ask which of the two wishes is preferred. In this way, the advisor forces the client to make a choice: do they not want to insure and not leave their partner well-provided for, OR do they want to leave their partner well-provided for and insure themselves? It is important that the advisor asks critical follow-up questions where necessary on the answers the client gives. Especially when the advisor notices contradictions or doubts about an answer.

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What are the AFM's observations?
The exploration shows that taxation is a point of attention. For first-time buyers, it generally goes well because the fiscal situation is usually relatively simple. For movers, we still see the points of attention that the AFM has already mentioned earlier. Mapping the mortgage history can be complex for the advisor, partly because clients do not provide sufficient information. Clients sometimes cannot provide this information because they are not aware of their exact mortgage history and this data is not available from other sources. But we also encountered situations where the advisor did not make sufficient effort to trace the fiscal history. Furthermore, we see in some cases that advisors do not take into account the remaining right to mortgage interest deduction at all. What risks does the AFM see? The risk of not fully gathering the fiscal history and the remaining right to mortgage interest deduction is that no account can be taken of the correct fiscal data in the overview of gross and net monthly costs. As a result, the advice might not be appropriate. It is of great importance for the client to know what their monthly mortgage costs will be and what part of their monthly income they will spend on mortgage costs. If the advisor fails to inform the client correctly, the client may be confronted with higher net monthly costs than expected. What does the AFM expect from the advisor? Following the 2014 study, the AFM already drew attention to this topic. To ensure that clients gain insight into what they have to pay net for the mortgage, the advisor must map the housing history as best as possible and take this into account in the gross and net overview. If it has indeed proven impossible to trace the fiscal history despite efforts, the advisor must clearly inform the client, so that they know there is uncertainty regarding the date when the mortgage interest deduction will expire. What are the AFM's observations? The file research shows that mortgage advisors do not always discuss the topic of relationship termination with their clients. When it does come up, it often remains limited to providing general insights, without going into the specific client situation where certain choices, such as the contribution of separate loan parts, may be relevant. What risks does the AFM see? In the euphoria of buying a house, partners prefer not to think about divorce. But relationship termination can lead to unexpected and far-reaching financial problems for clients, especially for the lower-earning partner. What does the AFM expect from the advisor? An advisor must ensure that both partners understand the financial obligations and risks they are undertaking. Advisors can play an important role by discussing these consequences explicitly. It is crucial that advisors pay sufficient attention to the client's fiscal history and inform them correctly about it. The consequences of relationship termination are always an explicit and client-specific part of
the advice conversation.

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Furthermore, it is important that advisors discuss the individual borrowing capacity of both partners after a divorce. The advisor can also encourage both partners to record financial agreements with a notary, such as cohabitation contracts and wills. This helps clients be prepared for the financial consequences of relationship termination.
What observations has the AFM made?
The file research shows that sustainability is not always discussed sufficiently.