A residual debt is the outstanding value of the mortgage when the house is sold at a loss. It is estimated that in the first seven months of 2014 Dutch mortgage lenders financed approximately 3.000 residual debts, with an average value of about 30.000 euros.
Most of the time, banks and insurance companies are only willing to finance the residual debts of their own mortgage clients. Compared to mortgages covered by the National Mortgage Guarantee (NHG in Dutch), mortgages that are not covered by the NHG require financing of residual debts much more frequently.
Many mortgage lenders demand that co-financed residual debt is paid off within 10 years. The SNS bank is an exception, accepting 20 years instead. After 10 years (or 15 years as of 2015) the mortgage interest relief for residual debt interest will end as well.
In case of residual debt financing, the mortgage loan may exceed 104 per cent of market value. For instance, ABN AMRO is providing up to 115 per cent of market value, while SNS bank provides up to 124 per cent.
If you have to sell your property at a loss and banks refuse to finance your residual debt, here are four alternative options:
1. Make additional mortgage repayments to reduce the mortgage value so it is less than the value of the property.
2. Avoid selling the property and wait until prices go up further. However, bear in mind that all property prices will be higher, meaning that it will also cost you more if you are buying another house.
3. Move house and finance the residual debt by taking out a private loan, credit or by using money provided by your parents or other family members.
4. The NHG can remit or cancel the residual debt, although this is only possible in cases of compulsory sale, and under strict conditions.