‘Prove you’re going to stay’: The challenges of buying a home in Denmark as a foreigner

The Local’s readers in Denmark shared their experiences of purchasing a house or apartment in the Nordic country.

'Prove you're going to stay': The challenges of buying a home in Denmark as a foreigner
Foreign house buyers in Denmark are typically asked for a higher downpayment on their mortgages. File photo: Niels Christian Vilmann/Ritzau Scanpix

With skyrocketing house prices in the last year and a half, closely linked to the Covid-19 pandemic, becoming a homeowner in Denmark hasn’t got any easier.

Foreign nationals looking to buy property can face additional challenges, including minimum residency requirements and banks asking for a higher down payment on mortgages.

We asked our readers to share their experiences. Thank you to all who took the time to get in touch.

One issue that was frequently mentioned was the higher down payment lenders ask for from foreign buyers.

“We knew as foreign buyers we had to put down 20 percent down payment in cash,” wrote Ellen, who bought a house in Aalborg with her partner in March this year. Ellen and her partner are both foreign nationals, with one holding an EU citizenship.

“The first question our real estate lawyer asked us was ‘how is your marriage?’ It is fine but this caught us very much by surprise,” she recounted.

Another reader, Paolo, reported “more down payment (sometimes up to 40 percent) and banks would request a proof that ‘we were going to stay in the country’.”

Not being a permanent resident counted against at least one reader when applying for mortgages.

“(Being refused a loan, despite provisional approval in the past) was a common thread with almost every bank we tried; they told us our personal economy was really great, but my lack of permanent residency was a risk. Of course this was never written down, but mentioned in phone calls,” wrote Drew Fremlev Fisher, who was turned down several times along with his Danish partner before eventually being accepted for a mortgage by the Lån og Spar bank.

Foreign nationals who have lived in Denmark for less than five years are required to apply for permission to buy real estate with the Ministry of Justice’s Department of Civil Affairs (Civilstyrelsen). This also applies to Danes who have lived abroad.

This affected the buying process for some of those who wrote in to us, although others described it as “additional paperwork” rather than an obstacle which would prevent buying.

READ ALSO: Danish government refuses to intervene over soaring house prices

“Getting the loan from the bank was difficult since we hadn’t lived in Denmark for five years minimum,” wrote Shweta, who purchased a house in Billund in March 2020.

“We had to go through multiple banks to get a bank loan with a good offer. We also had to get an approval from the government to buy property in Denmark. But it was handled by the real estate people and the approval arrived in a week or two,” Shweta recounted.

That approval was contingent on a condition that Shweta and her partner do not rent out their property.

“If we haven’t lived in Denmark for minimum of five years then we cannot rent out the property under any circumstances. Even if you have to move within the country, you will need to sell the property first,” she said.

Shweta told us that the mortgage taken out by and her partner has better terms than she might have expected in her home country, India.

“The total credit loan at 1 percent per annum was a great surprise and a home loan in India would be much more around 9 percent to 11 percent, I think,” she wrote.

Ellen mentioned another key difference compared to buying a home in the United States.

“In the US we have a real estate agent for both the buyer and the seller. Here in Denmark the real estate agent is only for the seller,” she wrote.

Another reader, Craig, also found that estate agents operate differently in Denmark.

“Estate agents work on a very different basis in Denmark compared to back home in South Africa where they charge a higher percentage than in Denmark but do not get a guaranteed monthly salary,” he wrote.

“The expectation of having to pay the agency fees after the agency contract has expired is also somewhat onerous, especially when the house has still not sold and the period is never-ending or you have to find a new agent and cannot self-sell,” Craig added.

“Holding an open house for only 30 minutes, with little or no warning is not what we were used to back home,” he also said.

In the later stages of the buying process, some were impressed by the efficiency of the handover once a sale had been agreed.

“It was incredibly quick to go through the purchase process once we had the money in place. About 2 weeks,” wrote Fiona Smith.

“We received an email from the sellers (the agent) saying ‘congratulations!’ before we’d actually paid the money but because we’d fulfilled all the criteria, the house was deemed to be ours,” she explained.

“We’re both British and in the UK pretty much anything could happen until you literally have the keys in your hand and contracts exchanged so that was a very pleasant surprise (and one we didn’t quite trust until we’d paid!),” Fiona said.

READ ALSO: How the cost of renting an apartment in Copenhagen compares to other cities in Denmark

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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.