Danish Mortgages

Danish Mortgage Basics
In Denmark, most mortgage finance is provided by seven major mortgage banks, the two largest being Realkredit Danmark (Web: www.rd.dk) and Nykredit (Web: www.nykredit.dk).

Borrowers can usually borrow up to 80 percent of the purchase price of a property, repayable over a term of between 10 and 30 years.

Danish Mortgages Financial Model
The character of the Danish mortgage market is very distinctive, with 98 percent of Danish mortgages being funded by bonds that are issued in the capital market. Both fixed rate and variable rate mortgages are available, with rates linked to the price of these bonds. When bond prices fall, mortgage interest rates rise and vice versa.

In effect, these bonds mirror the mortgages that they support. For example, if €300,000 is borrowed at a fixed rate over a 20 year term, the mortgage loan would be included in a collection of 20-year fixed rate loans which act as security for mortgage bonds of an equivalent value held by investors. The mortgage bank would sell an additional €300,000 worth of bonds in the financial market and credit the value to the borrower. As the mortgage is repaid by the borrower, the mortgage bank makes payments to the bondholders, in proportion to the value of their bonds.

The mortgage interest rate is agreed on the date that the mortgage is issued. It is calculated by taking the bond yield on that day and adding the mortgage bank’s margin to cover their costs. These mortgage bonds are traded on the Copenhagen stock exchange, so information about bond yields is widely available. As a result, the base rate is the same for all the mortgage banks, so they are forced to compete by trimming their margins. This competition between lenders results in margins of around 0.5 percent, which is considerably lower than the margins added by mortgage lenders in other EU countries. Mortgage arrangement fees are also consistent across the sector: 0.1 percent of the mortgage value plus a fixed fee of around €300.

Summary
Most mortgage finance in Denmark is provided by mortgage banks;
almost all Danish mortgages are funded by bonds that are issued in the capital market;
when mortgage bond prices fall, mortgage interest rates rise and vice versa;
Danish mortgage banks operate on very tight margins.