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How does Denmark’s state-guaranteed mortgage scheme work?

The Local Denmark
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How does Denmark’s state-guaranteed mortgage scheme work?
A new Danish government scheme aims to encourage banks to approve mortgages in rural areas. Photo: Signe Goldmann/Ritzau Scanpix

Since July 2022, banks in Denmark have been able to participate in a state-guaranteed scheme designed to promote home ownership outside of cities.

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The state-guaranteed mortgage scheme, “Lån på landet” (‘Loan in the Countryside’) has 17 participating banks and institutions at the time of writing. It took effect for three years from July 1st.

The scheme provides a state guarantee on a proportion of a mortgage taken out under the arrangement.

Customers at the banks can therefore benefit from having the Danish state as a guarantor on a part of their mortgage if they choose to make use of the scheme, which is designed to boost home ownership in provincial regions.

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Recent years have seen reports that banks in some cases turn down mortgage applications in rural areas because the postcode is undesirable.

“Denmark is too small a country for such big differences as those we see because of the uneven housing market,” business minister Simon Kollerup said in a statement.

“That is why it’s so important for us to create opportunities to get a state guarantee on a proportion of the mortgage out in our rural districts. I’m pleased to see so many banks are prepared to offer these loans,” he said.

READ ALSO: What do foreigners need to know about buying a home in Denmark?

The 17 participating banks and institutions at the time of writing are:

  • Lån & Spar Bank A/S
  • Kreditbanken A/S
  • Broager Sparekasse
  • Sparekassen Thy
  • Arbejdernes Landsbank
  • Middelfart Sparekasse
  • Nordfyns Bank
  • Nordea Danmark
  • Vestjysk Bank A/S
  • Nykredit Bank A/S
  • Nykredit Realkredit A/S
  • Totalkredit A/S
  • Sparekassen Danmark
  • Fynske Bank A/S
  • Simpel Kredit Ejendomsselskab ApS
  • Hvidbjerg Bank A/S
  • Sparekassen Sjælland-Fyn A/S

How does the scheme work? 

The model makes it easier to be approved for a mortgage in eligible regions via the state acting as a guarantor for 60-90 percent of the value of a home if the mortgage cannot be approved under normal conditions.

Certain other criteria must apply for the state guarantee scheme to be available: its sale price must be less than 10,000 kroner per square metre and it must also be located in a postcode area where the average sale price is less than 8,000 kroner per square metre.

If the sale price of the property is less than 8,000 kroner per square metre, the criteria for the average sale price in the postcode area does not apply.

An example provided by the Danish Business Ministry is as follows: A family wishing to take out a mortgage of 1 million kroner to purchase a home with an area of 130 square metres can be granted a state guarantee for part of the mortgage if the issuing bank decides the guarantee is necessary for it to approve the loan.

In this case, the state will guarantee 90 percent of the loan for 60-90 percent of its amount, which works out at around 270,000 kroner. This means that the bank is only carrying 10 percent risk for this portion of the mortgage, making it more attractive for the bank to approve the loan.

A fee system ensures that the state guarantee system is only used in cases where banks would not approve the mortgage under normal conditions.

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Where in Denmark is it available? 

Real estate media Bolius in an analysis published in July 2022 found that around 200 postcodes in Denmark could qualify for the guarantee system. These are located primarily in coastal areas far from major cities. A search function can be used within the article to check whether a specific postcode fulfils the criteria.

It should be noted that, even with a state guarantee available on part of the loan, it remains the final decision of the bank whether to approve a mortgage.

Therefore, the extent to which the scheme will encourage banks to approve more mortgages in rural parts of Denmark is hard to predict.

The decision rests on the bank’s assessment of the customer’s finances and the security of the loan in the short and long term, Bolius writes.

For rural locations, potential to sell the house without a loss, particularly in areas undergoing depopulation, can play an important role. This is because the bank risks making a loss in the event of foreclosure.

Additionally, lower house prices in rural areas mean smaller loans. These are less attractive for banks because the profits on smaller mortgages are also smaller.

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