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HOUSING

What you need to know when buying a home as a foreigner in Denmark

Finding a home to rent in big Danish cities is difficult, bordering impossible. So a lot of foreigners living in Denmark are looking at buying. We spoke to Steffan Reinel, partner at the Njord law firm, about how it works.

What you need to know when buying a home as a foreigner in Denmark
Houses in the Copenhagen suburbs. Photo: Mathias Løvgreen Bojesen/Ritzau Scanpix
Danish lender RealKredit on Monday began offering the cheapest mortgage in Danish history, so until the price of apartments shoots up as a result, this looks an ideal time to buy. 
 
But according to Reinel, foreigners buying property in Denmark should be extra careful, as getting it wrong can mean being forced to sell your property years after you’ve bought it, a fine as much as €3,000 and even a 30-day prison sentence.
 
 
“It’s dangerous to buy property in Denmark if you don’t have the necessary permit,” he said. “You have to be very sure that you are entitled to do it because otherwise it is you who are in trouble, not the seller.” 
 
When a foreigner buys a property, he or she has to make a declaration at the time of the purchase that they are entitled to buy it. Neither the estate agent managing the sale, nor the seller, are required to check that this is in fact the case. 
 
“If you have a seller who is very eager to sell to someone and a buyer is very excited about buying and doesn’t know the rules, there can be problems,” he said. 
 
READ ALSO: 
In every other European Union country, being an EU citizen is enough to qualify you to buy property. But not in Denmark. 
 
When the Danes joined the EU, they were so worried of wealthy Germans snapping up all their beloved cottages on Bornholm and the northern Jutland coast that they exacted an exemption from the EU’s ‘four freedoms’, covering movement of goods, people, services and capital. 
 
The five-year rule
 
As a result, even EU citizens are theoretically subject to a rule that you need to have been a resident in Denmark for five years. So if you are a German eyeing up a Bornholm cottage or a London billionaire looking for a Copenhagen crash pad, you are probably ruled out.
 
 
“It’s not related to citizenship, it’s related to residency,” Reinel explained of the five-year rule. “It doesn’t really matter what citizenship you have. You might be Indian, you might be German, but if you are a resident of Denmark then you are allowed to buy property in DK.” 
 
You also need to intend to continue staying in Denmark. This means that even if you are a foreign businessperson or diplomat posted to Denmark for six years, you might still not qualify as it is written in your contract that you do not intend to stay. 
 
Fancy a Copenhagen crashpad? Photo: Niels Ahlmann Olesen/Ritzau Scanpix
 
In practice, though, it is much easier for EU citizens to buy property, as long as they can demonstrate they are coming to Denmark for the purposes of work or setting up a business. 
 
“Say you came here teach samba, and rented a place to do it and have some income, basically you can do it from day one,” Reinel said of EU citizens. “But if it turns out after one year or more that this was not a real business, then you can be forced to sell your house.” 
 
You also risk a fine and prison sentence. 
 
Alexandra Lo Sardo, a ballerina at the Royal Danish Ballet who is originally from France, Linda Ligori from Italy, and Albertini Jeppe Augusto from Italy all said it had taken less than two weeks to buy a property when they did it. 
 
 
“The lawyer did all the work and the property passed over to me in less than 15 days … I even received the keys five days before the buying transaction had come to an end,” Ligori told The Local. 
 
“Permission is automatic for Europeans (less than two weeks),” Augusto said. “And after five years you can buy a second house too.” 
 
Getting an exception 
 
Even if you’re not an EU citizen, and haven’t been resident in Denmark for five years, it is still possible to buy a property in Denmark. But it requires getting an exemption from the The Department of Civil Affairs, part of the Danish Ministry of Justice. This is where you need expert legal advice, as the system is based on past practice and not on any firm legal criteria. 
 
“The exception is just phrased in law as ‘the ministry can give an exception’ and it does not say in what circumstances and why,” Reinel explained. “There are a lot of factors which could be part of the investigation, but what they evaluate is that you have a very strong connection to Denmark.”
 
That might include speaking fluent Danish, coming from the Danish-speaking minority in the north of Germany, having strong business connections to Denmark, or having Danish ancestors. It might also include marital status, and whether the applicant has children at school or daycare in Denmark. 
 
The guidance in English from the ministry is here on its website
 
Judy Schimper, from South Africa, said she had been able to buy a property in Copenhagen after living just eight months in the country. 
 
“I am non-EU (Africa) and had no issues. My lawyer got permission for me within two weeks. I didn’t have to do a language assessment,” she told The Local. 
 
Relaxing the rules? 
 
Recently, Norwegians, Swedes and Germans have been increasingly successful at buying properties even though they are not resident, leading the Danish People’s Party to call for a total ban on Monday. 
 
In 2007, only 54 permits were granted for foreigners purchasing holiday homes in Denmark, but in 2018, to the ire of many in the Danish media, there were 374 exemptions granted.
 
Karina Søndergaard, a lawyer at HjulmandKaptain who specializes in getting exemptions, said as many as three quarters of her clients were successful. 
 
But Reinel argued that the five-year rule was still quite difficult to get around for non-EU citizens and took at least two months. 
 
“You have to realize that the five-year rule is a very strict rule, and they normally would not give an exemption, so if you’ve been here for two years and you’re not an EU citizen, it’s tough.” 
 
Indeed, if you buy a house as a recently arrived non-EU citizen and find it too easy, you should demand to see the documentation that your lawyer has actually managed to secure the exemption. 
 
It is quite possible to purchase an apartment without having an exemption, simply by declaring that you have the right to do so, but this does not mean that you actually do. 
 
“All you have to do is to give the declaration saying that you are entitled to buy property because you fulfil the residency criteria,” Reinel said. “It is only if you don’t fulfil it that you have to apply to permission, but it could be illegal if it’s not true.” 

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PROPERTY

EXPLAINED: How to restructure and reduce your mortgage in Denmark

Denmark's unique borrowing system has enabled thousands of people to restructure their mortgages this year, cashing in on high interest rates which have caused a drop in market value of covered bonds. We explain how it all works and how you can potentially pay off a sum of your mortgage.

EXPLAINED: How to restructure and reduce your mortgage in Denmark

How does the mortgage system work in Denmark?

Denmark has a unique mortgage model, which is regarded as one of the best in the world.

When you take out a loan to buy a house in Denmark, the bank finances the loan through a covered bond [Danish:realkreditobligation,ed.] What makes the model unique is that you as the borrower know exactly what covered bond is issued to finance the loan.

“This direct link is very special to Denmark,”  Peter Jayaswal, executive director at Finans Danmark told The Local.

“You can follow what the market price is for the bond that is funding your loan in the capital market. A German borrower for example has a mortgage by the German bank issuing a loan using a covered bond. But there is no link, so the homeowner doesn’t know what the bond is.

“In Denmark, you can see it exactly. You can go onto your bank website everyday and follow the market price. That means that we have this early repayment system where I as a borrower am allowed to prepay my loan by buying back at market price the bond that has funded my loan,” Jayaswal explained.

When interest rates are increasing, it means that the price on the bonds is decreasing and this is why thousands of homeowners in Denmark have bought out their bonds this year, at a low market value and paid off a portion of their mortgage. 

READ ALSO: Interest rates encourage Danes to restructure mortgages

So how can I make this early repayment on my mortgage?

The first thing to do is to set up a meeting with your bank so they can assess whether you will benefit from the drop in bond value.

The market price of covered bonds is well documented in Danish media but you can also follow them on your bank’s website or by asking for an appointment with your bank to assess your current mortgage.

“You may at some point in the past have taken out a mortgage of 1 million kroner with a one percent fixed interest rate. To keep it simple, let’s say the loan is without amortisation.  When you took out this mortgage, the bond was issued at 99 kroner meaning that the nominal debt will be around 1,010,100 kroner to give a 1 million kroner revenue.

“Today you can see the interest rates have increased and the price on the bond financing your loan is say 80 kroner. As a borrower you can buy the bond in the market at market price and prepay the mortgage loan. But you only need to take out a new loan of around 808,000 kroner to do this.

“So you can take a new loan out at 808,000 kroner and use this to repay your existing loan and reduce your debt by around 200,000 kroner. This transaction can be done simultaneously by your bank, so you won’t end up with two loans,” Jayaswal told The Local.

What about interest rates on my mortgage?

The interest rate you get for your mortgage can be fixed or variable and they mirror the prices investors pay for the bonds. 

Fixed rate mortgage

Today, the fixed interest rate is five percent. This means that if you decide to buy your bond at the lower market value, you will have to take out a new loan at a higher interest rate.

“Using the example of reducing your mortgage by 200,000 kroner by buying the bond at a low market value, every month you are now paying an interest rate of five percent fixed term, rather than your one percent you had before. So you are paying more each month for the benefit of paying off a portion of your mortgage early and the benefits will decrease over time. 

“You usually break even after around ten to fourteen years but the bank will calculate this for you,” Jayaswal said.

“If you know you’re moving in two to three years, it makes sense to get a new loan with a higher interest rate because you’ll have to repay the loan anyway when you move. But if you think you’ll be in your home a long time, keeping this loan, then you need the interest rate to decrease in ten to fourteen years.

“And that’s the problem because we must be frank and say we can do all the forecasts but in the end no one knows what future interest rates will be, so it has to be the decision of the borrower,” Jayaswal explained.

Variable rate mortgage 

The other option is to take out a variable interest rate mortgage to buy the bond, which today is around three percent. However this carries a risk, as the interest rates are adjusted on a regular basis. F3 loans, for example, are adjusted every three years, while F5 loans have adjustments every five years.

“Changing from a fixed to variable interest rate, to reduce your debt and avoid an increase in interest rate, comes with a risk that you don’t have a fixed rate for 30 years, so you are more exposed and that’s very important be aware of,” Jayaswal told The Local.

On Monday, the company Totalkredit, the largest provider of real estate loans for private homes, auctioned flexible loans with resulting interest rates exceeding 3 percent on the F1, F3 and F5 loan types. That means the interest on these types of mortgages will be at their highest for several years.

According to Finans Danmark, Danish home owners have repaid 337 billion kroner of their mortgages in the first three quarters of 2022. Many of these home owners have chosen to switch to variable interest rates. You can swap back to a fixed-rate mortgage at any time but you also have to be aware that these rates may have increased by then too. 

How do I decide which option to take?

“I always say to people, feel free to go to your bank, ask them to make the calculations for you, so you have the foundation to make a decision”, Jayaswal says.

“Some might think a 30-year mortgage at a fixed rate of one percent is great, especially because today interest rate is five percent. Others won’t mind paying a five percent interest rate for a few years, because they want to reduce their debt today and believe interest rates will decrease. It is up to the borrower to decide.

“It’s not that one option is better than the other, it’s that you have opportunities and this is unique in Denmark,” Jayaswal said.

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