Danish Homeowners' Loan Choices Reflect Low Interest Rates Amid Regulatory Landscape

The Danish housing market has seen a notable shift in loan choices in response to the prevailing low interest rate environment. This trend is evident in the recent statistics published by Danmarks Nationalbank, which highlight the impact of monetary policy on homeowners' financial decisions.

Why this matters: The Danish housing market's shift towards variable interest rate loans has significant implications for the country's financial stability and economic growth. If not regulated properly, it could lead to a housing market bubble and increased risk of defaults, affecting not only homeowners but also the entire economy.

In the first four months of 2024, Danish private customers took out 17,900 new mortgage loans with variable interest rates, totaling kr. 36.7 billion. The most popular new mortgage loan with a variable interest rate is the F3 loan, with a three-year interest rate fixing period, making up more than every third new loan.

Loans with very short interest rate fixing periods of 3 or 6 months are the second most popular choice. The average interest rate fixing period on new loans with variable interest rates has increased to just over 2 years and 4 months in the first four months of 2024, up from just under 2 years in 2023.

This shift in loan preferences is influenced by the Danish National Bank's monetary policy and the overall economic conditions in Denmark. The low interest rate environment has made variable interest rate loans more attractive to homeowners, despite the potential risks associated with future rate increases.

Historically, housing market imbalances have been a catalyst for recessions and periods of financial instability. To address these risks, Danish authorities have introduced several rules since 2013 to regulate households' access to mortgages. These rules were implemented during a period of low nominal interest rates and aim to mitigate risks related to the low interest environment.

Danish banks and mortgage credit institutions are subject to borrower-based measures, which restrict the most highly indebted borrowers. These measures include limits on loan-to-value ratio, debt-to-income ratio, and access to interest-only mortgages and variable-rate mortgages. The rules are outlined in the Good Practice for Mortgage Lending and the Executive Order on Governance, applying solely to Copenhagen and Aarhus.

The higher interest rates since 2022 have reduced the number of borrowers affected by these lending rules. These rules were designed to protect homeowners from risks such as rising interest rates or falling property prices and to ensure that lenders do not loosen credit standards.

The debt service-to-income (DSTI) ratio, defined by the sum of interest and installments divided by after-tax income, is a key metric in assessing homeowners' financial robustness. The typical homebuyer, with income and down payment equivalent to the median for their group, has a median DSTI of 17%. High DSTI, defined as a DSTI of 30%, corresponds to approximately the 90th percentile for families with two children who purchased a home during the period 2020-23.

The Danish lending rules aim to address risks related to the low interest environment and protect homeowners from financial vulnerabilities. The higher interest rates since 2022 have naturally reduced the number of borrowers affected by these rules, providing an opportunity to evaluate their effectiveness in ensuring financial stability.

Key Takeaways

• Danish homeowners shift to variable interest rate loans amid low interest rates.
• 17,900 new mortgage loans with variable interest rates were taken out in Q1 2024.
• F3 loans with 3-year interest rate fixing periods are the most popular choice.
• Danish authorities introduced lending rules to regulate mortgages and mitigate risks.
• Higher interest rates since 2022 reduced the number of borrowers affected by lending rules.