Photographer: Freya Ingrid Morales/Bloomberg

The Danish Logic Behind Paying Off Mortgages at a Time of Negative Rates

Updated on
  • Consumer patterns defy text-book logic of low interest rates
  • Crisis hit Danes harder than Nordic neighbors, Nykredit says

Danes are repaying their mortgages at the fastest pace in a decade and siphoning ever larger amounts of cash into their bank accounts.

What’s puzzling is they’re doing this at negative interest rates. In practice, it costs virtually nothing to borrow while depositors get virtually nothing on their savings.

But there’s a certain Danish logic to this and it’s learned from the 2007-08 financial crisis, according to Nykredit, Denmark’s biggest mortgage lender.

“Danes got burned and now they’re shy of the fire,” Tore Stramer, Nykredit’s chief economist, said in a phone interview. “Danes borrowed more than anyone else last time around and eventually faced one of the biggest drops in property prices in the Nordic region. That’s made them more cautious.”

The central bank last week published data that showed Danes repaid 2.12 percent of their mortgage debt last year, the highest rate since 2004. Danish household assets rose to a record 6.33 trillion kroner ($1 trillion) at the end of June as savings and equity investments peaked, according to central bank data.

In the aftermath of the financial crisis, Danish debt loads ballooned to 340 percent of household income, while property prices dropped as much as 35 percent. The trauma, Stramer says, was much more severe than elsewhere in Scandinavia, where households are now taking advantage of ultra-low rates to load up on debt.

Read more about Sweden’s housing-market correction

Consumption and nationwide home prices only recently returned to pre-crisis levels as Danes managed to cut household debts to below 300 percent of income. Only the Irish have succeeded in cutting the household debt loads faster, of the 32 members of the Organisation for Economic Cooperation and Development.

In a speech earlier this week, Danish Central Bank Governor Lars Rohde said that almost a full decade later, the financial crisis “is still affecting households’ consumption and savings patterns.”

As the global rate cycle is starting to turn, the governor said Danish companies, banks and households are all well positioned to cope with higher rates. “In fact, higher rates will be a welcome contribution to curbing house prices as the recovery gains momentum,” Rohde said.

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