Danish Central Bank Warns Low Rates Increases Borrower Risk

Danish home buyers need to pass tougher credit standards to avoid front-loading Denmark’s $550 billion mortgage system with risks as rates have been pushed to record lows, the central bank governor said.

Current testing, which screens borrowers to see if they can make payments on a 30-year fixed rate mortgage with a fixed interest rate of 2 percent, is now too lax, Governor Lars Rohde told reporters at the Danish Mortgage Banks’ Federation annual meeting in Copenhagen.

“It’s obvious it’s not much of a stress test,” he said. “We’ve seen rather abrupt rate moves in the past, even upwards, which makes it important that stress tests are considerably tougher.”

Rohde has cut the benchmark deposit rate four times to minus 0.75 percent and spent 275 billion kroner ($40 billion) to defend Denmark’s currency peg to the euro since January. The interventions have fed through to mortgage rates, pushing 30-year benchmark rates down to about two percent. Adjustable-rate mortgage notes, refinanced annually, have seen rates decline to almost zero.

The only alternative to tougher testing would be to deny borrowers access to adjustable-rate loans and only issue fixed-rate mortgages, Rohde said.

The central bank last week cautioned against property bubbles forming in the larger cities, predominantly Copenhagen. According to Danske Bank A/S, Denmark’s largest lender, local price increases won’t prompt a risk to the Danish economy because prices will only increase 3.7 percent in 2015 and 4.4 percent next year.

“Bubbles arrive when buyers speculate in price increases and we’re seeing nothing of that,” Steen Bocian, the bank’s chief economist told reporters in Copenhagen Wednesday. “We need mortgage lending to accelerate to consider if prices are rising too fast and that’s not the case.”

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