Danish homeowners with flexible rate mortgages could face raised costs

Interest rates on flexible rate mortgages are likely to increase from next year after auctions by real estate lender Totalkredit on Monday.

Danish homeowners with flexible rate mortgages could face raised costs
Interest rates are set to increase on many Danish variable rate mortgages from next year. File photo: Kasper Palsnov/Ritzau Scanpix

Totalkredit, a subsidiary company of bank Nykredit, is the largest provider of real estate loans for private homes.

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

Totalkredit works with a number of major Danish banks including Arbejdernes Landsbank, Spar Nord and Sydbank.

The company auctioned flexible loans on Monday with resulting interest rates exceeding 3 percent on the F1, F3 and F5 loan types, news wire Ritzau reports.

That means the interest on these types of mortgages will be at their highest for several years.

“This round of interest revision auctions has ended with massive interest rate increase,” Arbejdernes Landsbank private economist Brian Friis Helmer Ritzau in a written comment.

“That is in stark contrast to the many years with auctions that finished with interest rates in the negative,” he said.

Helmer said that people with affected mortgages should look at their preliminary tax returns for 2023, which were published last week, in order to help reduce the impact of additional costs.

READ ALSO: Forskudsopgørelse: Why checking your preliminary Danish tax return matters

“Because if you choose to register, in advance, the higher costs due to interest, you will get a higher interest rate deduction [rentefradrag in Danish, ed.] with immediate effect,” he said.

“If you don’t do anything, that doesn’t mean you’ll be landed with more tax, but you’ll get the money back in spring 2024,” he noted.

Unlike mortgages with fixed rates, variable rate mortgages see their interest rates adjusted on a regular basis.

F3 loans, for example, are adjusted every three years, while F5 loans have adjustments every five years.

The interest rates are revised because the bonds [Danish: obligationer] on which the loans are secured expired and must be replaced. The interest rates for the new bonds are set at auctions.

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Home sales in Denmark sink to lowest level since 2013

The number of home sales in Denmark fell over the last three months to the lowest level since the start of 2013, when the country was still emerging from a protracted housing slump.

Home sales in Denmark sink to lowest level since 2013

Only 9,931 homes were sold in the last three months of 2022, according to the latest figures from the trade body Finance Denmark, the lowest number for 39 three-month periods. At the same time prices have fallen back to the levels they were at at the end of 2020. 

“The second half of the year in particular showed a marked decline in housing transactions,” Brian Friis Helmer, economist at Arbejdernes Landsbank. “The headwind comes from higher interest rates, higher energy bills and financial uncertainty.” 

Prices of apartments fell by 7.2 percent last three months of the year compared to the same period in 2021, while prices for detached houses fell by 6.3 percent. 

Bo Sandberg, housing economist at the Confederation of Danish Industry, said that this made Denmark one of the European countries which had seen the biggest falls. 

“We are pretty much only exceeded by Sweden,” he wrote in a commentary. “The peak of the price increases, which occurred during an exceptionally favourable and historically unique period in the housing market, has now been shaved off, and prices are back at the 2020 level.”

A survey of Danish home owners carried out by Finance Denmark in February 2023 found that a slim majority of 55 per cent expected prices to remain stable over the coming 12 months, with only 20 percent expected prices to drop more than 1 percent. 

This compared to 30 percent who expected a drop of more than 1 percent a year ago. 

Only 2.9 percent of home owners expected a fall of more than 5 percent, while 13 percent expected prices to rise over the next year, with 4.5 percent expecting a rise of more than 5 percent. 

“Energy prices have fallen significantly in recent months, and consumer prices are not rising as quickly as in the past. At the same time, more people have probably got used to the higher level of interest rates,” Ane Arnth Jensen, deputy managing director of Finance Denmark, said in a press statement.

“This may be part of the explanation for the fact that the Danes expect the future to be a little brighter, and many expect a calmer housing market in the coming year. But whether that will happen, only time will tell.”