Advantages of the Danish Mortgage Model
Because competition between mortgage lenders is so intense, borrowers do not need mortgage brokers to identify the best deals, with the result that the mortgage broking sector has not developed in Denmark.
If borrowers with fixed rate mortgages want to refinance when interest rates fall, they are able to do so by purchasing bonds with a value equivalent to their outstanding mortgage balance, hence reducing their monthly repayments. When interest rates rise, borrowers have the choice of either continuing with their existing fixed rate mortgage or, alternatively, they can remortgage by buying back bonds at the depressed market price and making a capital gain, in exchange for increased future loan repayments.
Disadvantages of the Danish Mortgage Model
Because of the nature of the funding model, Danish lenders are more interested in the value of the property than the borrower”¦s ability to make repayments. If a borrower fails to make the required repayments, mortgage banks will initiate repossession of the property much more speedily than in other European countries, in order to protect investors”¦ interests.
As a consequence, mortgages charged at higher rates of interest are not available for higher risk borrowers, so potential borrowers with poor credit history are effectively excluded from the Danish mortgage market. In addition, borrowers have to make a down payment of at least 20 percent when purchasing a property, so getting on to the property ladder can be difficult for higher risk borrowers and for many first time buyers.
Export of the Danish Mortgage Model
Because of the perceived success of the Danish method of funding the purchase of property, a number of developing countries, include Mexico and the Philippines, are planning to introduce the Danish model. Making lower cost loans available to borrowers and giving a nation”¦s pension funds a wider choice of property bonds in which to invest seems to appeal to politicians in several countries. With appropriate government regulation of financial institutions there appears to be no reason why Danish style mortgages should not be successful in other nations.
Because of the level of competition between mortgage providers, mortgage brokers have been unable to gain a foothold in the Danish market;
if necessary, Danish borrowers can easily refinance their mortgages;
potential borrowers with poor credit history can find it difficult to obtain mortgage finance in Denmark;
a number of developing countries are likely to introduce the Danish mortgage funding model.