Danish households, who carry the biggest gross debt loads of any population in the rich world, look to have turned a corner.
Danes repaid their home loans at the fastest pace in history last year, according to the Association of Danish Mortgage Banks. At the same time, record-low interest rates and higher fees on riskier loans are driving more borrowers over to fixed-rate mortgages, which now cost as little as 2 percent for 30 years. The developments have helped banks meet demands to cut risks.
“We’ve been asked by regulators, the central bank, ratings companies to go in this direction,” Ane Arnth Jensen, the association’s director, said in an interview on Friday. “Now those who want to have risk have to pay for that.”
After years of warnings from ratings companies and the central bank that Denmark’s $450 billion mortgage-bond market was growing less stable amid an over-reliance on adjustable-rate loans and products that delay amortization, the industry and borrowers have emerged looking stronger than they did just half a decade ago.
Last year, borrowers repaid 3.87 percent of amortizing loans, according to the mortgage association. That compares with 2.74 percent in 2008, the year Denmark’s real estate bubble burst, eventually taking dozens of community banks with it.
“That is a relatively high increase,” Jensen said.
Two things are driving the figure higher, she said. Part of the increase comes from borrowers who began amortizing after a 10-year interest-only grace period ended. Most comes from lower interest rates, meaning a bigger share of the fixed payment that borrowers with adjustable-rate loans is principal, she said.
“It’s an advantage for the borrower that you actually can bring your loan down at a faster speed,” Jensen said. “You save some on interest payments on the one hand, and even though you’re paying more on principal, that’s money you’re paying yourself.”
The world’s biggest mortgage market per capita has been buoyed by a period of unprecedented monetary easing. Denmark, which has spent the past three months fighting back attacks against the krone’s peg to the euro, has cut its key rate to minus 0.75 percent. Mortgage bonds with maturities as long as three years trade at negative yields, according to data compiled by Bloomberg.
“We have the benefit of extremely low rates, so there’s a natural incentive to move into fixed-rate loans,” said Klaus Kristiansen, executive vice president at Realkredit Danmark, the mortgage arm of Denmark’s largest lender Danske Bank A/S.
Higher fees on riskier loans, including those financed by one- and two-year bonds, also have helped nudge borrowers, according to Kristiansen. It’s already meant lower over-collateralization requirements by Fitch Ratings and Standard & Poor’s, he said.
“Going forward, there may be lower income but that was well considered when we made the price incentives,” Kristiansen said. “But moving out of short-term financing will increase stability and this will benefit the market.”
Danish household debt, at three times disposable income, is the highest among developed countries, according to a December report by the International Monetary Fund. While assets including pension savings exceed what Danes owe their creditors, the investments are mostly illiquid.
The progress made so far to stabilize the market isn’t guaranteed, though.
The flip side of the extreme monetary environment is that house prices have started to surge in some parts of Denmark, just seven years after the country’s most recent property bubble burst. Though not a major concern yet, policy makers should monitor the situation, according to the IMF.
“Central Copenhagen is looking a little frothy but the prices in a lot of the country and in Copenhagen also are still shy of 2006 and 2007,” Thomas Dorsey, the IMF’s mission chief to Denmark, said in an interview. “Although that should not necessarily be your target, so it seems like that is something to keep an eye on but not an obvious problem at this stage.”
Banks also need to do more to make sure borrowers taking out adjustable-rate mortgages can afford their loans when rates rise, according to Fitch. When that happens, fixed-rate loans also may become less attractive, putting a half-decade of work toward stabilization at risk.
“If the yield curve steepens, it might become quite important to have the right price incentives,” Kristiansen said. “What’s built into the pricing structure are incentives to move out of interest-reset loans. We have had success and are quite satisfied with that.”