Mortgage payments in Denmark are set to jump on January 1st, after mortgage bond auctions by Totalkredit and Realkredit set significantly higher rates for their so-called F1, F3, and F5 loans. 

The F1, or one-year fixed mortgage, will have an interest rate of 3.88 percent, while the F3 (three-year) and F5 (five-year) rates will be 3.39 and 3.37 respectively, Totalkredit announced in a press release, following four days of auctions. 

Similar auctions held by Realkredit Danmark set rates for the three loans at roughly the same level, with the F1 interest rate set at 4.05 percent, also the highest since 2009, the F3 interest rate at 3.39 percent, and the F5 interest rate at 3.33 percent.

How does Denmark’s mortgage system work? 

Denmark has a unique mortgage model. 

When you take out a loan to buy a house in Denmark, the bank finances the loan through a covered bond, or realkreditobligation. What makes the model unique is that you as the borrower know exactly which covered bond was issued to finance the loan.

Because of the way the Danish mortgage system is structured, mortgages are loaned primarily by banks which specialise in real estate loans, known as realkreditinstitutioner. The remainder of the mortgage is lent by the customer’s bank, which approves the mortgage to the homeowner.

Totalkredit, a subsidiary of the Nykredit bank, is Denmark’s largest provider of real estate loans for private homes, with Realkredit Danmark, which is owned by Danske Bank, the runner up. 

The bond auctions held this month saw Denmark’s realkreditinstitutioner refinance their one, three and five year loans, and also refinance two- and four-year loans which are used to structure amortisations. 

“They sell them to bond investors, who make bids, and that’s how the interest rate is fixed for these homeowners,” Brian Friis Helmer, a private economist at Arbejdernes Landsbank, told The Local. 

The banks and realkreditinstitutioner will then charge an extra percent or so, depending on the size of the loan and the risk profile of the individual borrower. 

What will the increase in rates mean for Danish borrowers?

If you have a three-year or five-year mortgage, it is pretty significant.  

“The last time they got a new interest rate was three and five years ago, and I think some of them have a negative interest rate on their loan, or close to zero, so it’s a big change in their monthly budget,”  Helmer told The Local. 

According to figures from Totalkredit, the bonds behind the previous three-year mortgage, which came into force in January 2021, had a rate of -0.33 percent, while those underpinning the previous five-year mortgage, which applied from January 2019, had a rate of 0.36 percent. 

This means that customers with a three-year loan will see their monthly payments increase by around 1,000 kroner a month per million kroner of mortgage, while those who stick with a five-year loan will see their mortgage payments increase by 830 kroner a month.  

Many people, however, have shifted to a one-year fixed loan, betting that rates will fall next year. 

They are having to pay a high price in the short term. Those who have moved from three-year to a one-year fixed mortgage will see their payments increase by 32,000 kroner after tax per million kroner mortgage over the year, while those who shifted from a five-year to a one-year mortgage will see their payments rise by 28,400 kroner. 

Helmer told Ritzau that homeowners faced a hit regardless of which of the realkreditinstitutioner they had their mortgage with. 

“Of course, there is a difference in the interest rates that are set, but they will land roughly at a rate of around 3.5 to 4 percent for home owners who have F-1, F-3 and F-5 loans, regardless of which mortgage institution they are customers with,” he said. 

How will the rise in payments affect Denmark’s economy?

Svend Greniman Andersen, senior economist at Totalkredit, pointed out that those affected by the higher rates only represented about five percent of Danish homeowners. 

“If you go back to the summer of last year, which is when rates started to really go up, so far, about half of homeowners with variable rate mortgages have had their rates fixed and increased,” he said.  

“So there’s still a half that has not had any impact yet. From January 1st, there will be an additional 10 percentage points – so that’s like of of of the ones with variable rates. So that’s five percent of all homeowners.” 

He said that the impact of the increased rate on consumption would as a result have only a limited impact on Danish consuption. 

“Whether that’s a small or big, I don’t know. If you’re an economist, you expect that people are anticipating this. They’re already taking it into account.” 

What can people do about the increase? 

Those with one, three and five-year mortgages had until the end of October to refinance with either a shorter or longer-rate mortgage. Those who did not do so will be stuck with the rates agreed this week. 

Andersen said that many people had this year decided to shift to a one-year fixed loan, betting that they will be able to move back to a one, three or five-year loan at the end of next year at a lower rate. 

He said his bank estimated that homeowners would see their interest rates peak next year, with payments likely to be unchanged, or even fall, in 2025. 

Helmer also said that he expected that rates had now peaked. 

“If you have chosen an F1 loan, our expectation is that there should not be any more interest rate increases when you get a new interest rate in a year’s time. Instead, the interest rate will perhaps remain unchanged or fall slightly.”