DMFCO AM: Foundation problems pose limited financial risk for mortgage investors

September 4, 2025

^{This article was originally written in Dutch. This is an English translation.}

Climate change poses financial risks for investors in Dutch residential mortgages. What is the impact of foundation problems on mortgage investments and how can these risks be mitigated?

By Luuk Willems and Harmen Schot, DMFCO Asset Management

 
Pile rot poses a foundation risk for Dutch homes built before 1975 that are not built on stable sandy soil. The wooden piles on which these houses rest are often affected by wood rot, which can cause subsidence. Pile rot is not an issue for homes built on stable sandy soil or homes built since the mid-1970s with modern concrete piles. However, other foundation problems can occur in these homes.

This article focuses specifically on pile rot, as the repair costs are often considerably higher than for other types of foundations.

The main cause of pile rot is fluctuating groundwater levels.

Prolonged periods of drought, combined with active groundwater management, can lead to a lowering of the groundwater level. This exposes the heads of wooden foundations to oxygen, creating favourable conditions for mould growth. This gradually but irreversibly affects the structural integrity of the wood.

Foundation problems are not a recent phenomenon. They have been known for more than 20 years, but there is no overarching approach to investigate their scale and identify possible solutions (Kok et al., 2021; Rli, 2024). Public awareness among homeowners is limited: about half do not know what type of foundation their home has. Many also mistakenly assume that such damage is covered by standard insurance policies. Foundation repair is usually associated with significant costs, which can cause financial hardship for households.

Scope, costs and impact on property values

Estimates indicate that by 2035, up to 425,000 homes may be affected by foundation problems, 25% of which are expected to be due to pile rot (Rli, 2024). Repair costs vary from €54,000 to €100,000 per home (KCAF, 2019). This amounts to €1,750 to €2,000 per square metre of ground floor area (Municipality of Rotterdam, 2025).

This risk is often not fully reflected in the market value of homes. This is due to factors such as limited knowledge among buyers, a lack of incentives for sellers to investigate the foundations and a general shortage of reliable data (AFM, 2025). However, research shows that when foundation problems are reported, sales prices can be up to 12% lower (Hommes et al., 2023).

These foundation risks are particularly relevant for investors in Dutch residential mortgages, as the homes serve as collateral. Any structural deterioration or depreciation has a direct impact on the value of the collateral.

Quantifying risk through statistical modelling

The financial impact of pile rot can be assessed using a statistical credit risk model. This model identifies homes at risk based on two main criteria: the presence of wooden piles in the foundation and the location on clay or peat soil. Soil maps provide essential geographical data, while Deltares has estimated the probability of wooden pile foundations based on location, year of construction and soil type. For each property, the probability of a wooden foundation is compared with a random value from a uniform distribution to determine whether wooden piles have been used.

Once these criteria are met, exposure to groundwater is simulated to estimate cumulative drought conditions. This approach includes both current and projected groundwater levels. Where data is limited, historical averages are used and future projections up to 2050 from the Climate Impact Atlas, which take into account factors such as climate change, urban development and water management.

The extent of damage depends on the duration of exposure. Studies indicate that wooden piles lose their bearing capacity after 10 to 20 years of cumulative drought. This deterioration is modelled using an exponential damage function, which gradually reduces structural integrity between years 10 and 20.

The financial loss resulting from foundation problems is calculated on the basis of repair costs. These are estimated at an average of €1,850 per square metre of ground floor area. In the case of multi-family dwellings, these costs are divided among the individual units in proportion to their share of the total floor area.

Mitigating factors for investors

The losses for mortgage investors resulting from foundation repair costs are limited by a number of mitigating factors:

1. Loan-to-Value (LTV) ratios:
2. Mortgage repayments can create financial scope to finance necessary repairs. If the homeowner is able to pay for the repairs, the investor can avoid direct losses, provided that the repair costs are ultimately reflected in the property value.
3. National Mortgage Guarantee (NHG):
4. In cases where mortgages are covered by NHG, losses for investors are limited. The model assumes that, if there is insufficient LTV capacity, 90% of such losses will be covered by the guarantee.

Homeowners can also call on the Sustainable Foundation Repair Fund. Access to this fund also acts as a loss mitigation measure for mortgage investors, but has not been taken into account in the model.

A test using collateral from our organisation's entire mortgage portfolio showed that approximately 47% of homes are built on clay or peat soil. Taking into account the likelihood of wooden piles being present, it is estimated that 12% of the collateral in the portfolio meets the conditions for pile rot. Simulations indicate that 1.1% of all collateral will suffer damage before the end of the mortgage term, in line with current research results on pile rot (Deltares, 2024). Figure 1 shows in grey the number of collateral properties with foundation damage due to pile rot over time, compared with the limited number of mortgages that are expected to suffer losses as a result, shown in red.

Affected homes versus losses

Thanks to the mitigating factors, the total impact on investors remains limited. Only 0.04% of all loans are expected to result in losses. Where losses do occur, they will amount to an average of approximately €46,000. This represents a total projected loss at portfolio level of approximately 0.1 basis point per annum over the entire term of the mortgages.

This low expected loss indicates that it is not necessary at this stage to explicitly take this risk into account, for example when valuing investor portfolios. Nevertheless, continued vigilance and monitoring are essential.

The impact on homeowners, on the other hand, could be significant due to the high repair costs. This could result in major financial burdens and emotional stress.