Danish Mortgage Banks Welcome Central Bank Shift on IO Loans

Denmark’s mortgage bankers welcomed a shift in stance from the central bank that removes pressure on the industry to phase out interest-only loans.

Central bank Governor Lars Rohde said he doesn’t see the need to abandon interest-only loans, arguing it’s good for Denmark’s home-loan industry to have a broad range of products to offer borrowers. Instead, banks should exercise more restraint in handing out the loans, Rohde said in an interview published today.

“Rohde still wants something done about interest-only loans but he wants the mortgage banks to take the initiative themselves, and we think that is the right way to do it,” Karsten Beltoft, the head of the Danish Mortgage Bankers’ Federation, said in a telephone interview today. “And we have taken the initiative. Let’s see now how it will change the situation.”

Rohde’s defense of interest-only loans marks a departure from the line adopted by his predecessor, Nils Bernstein, who argued the products were inherently risky and should be phased out. Since their introduction in 2003, the mortgages have grown to make up 56 percent of Denmark’s home-loan market, industry figures show.

`Totally Disappear'

“Bernstein wanted them to totally disappear from the market but it’s impossible to say you can’t have interest-only loans. Customers will just go to the banks,” Beltoft said. “You can’t make them disappear. You can only make them disappear from the mortgage banks. That would make them more expensive, if that’s what you want.”

Rohde did say loan-to-value ratios on interest-only loans should probably be “significantly” lower than the 80 percent regulatory cap that applies to most of the rest of Denmark’s residential mortgage market, a change the industry opposes.

“We don’t agree that the LTV limit for interest-only loans should be lower,” Ane Arnth Jensen, director of the Association of Danish Mortgage Banks, said by phone. The loans are “to some extent more risky” but banks are handling that risk by making sure borrowers can afford to pay both interest and principal when taking out a loan, she said.

“Mortgage banks also have increased the margins on interest-only loans,” Arnth Jensen said. “So yes, there is a higher risk but the higher risk has been handled by these steps that the mortgage banks have taken.”