The situation in the Middle East, specifically the closure of the Hormuz Strait, has pushed up interest rates ‒ and it’s coming at a bad time for Danish homeowners.
Totalkredit, one of Denmark’s largest mortgage credit institutions, told public broadcaster DR that developments in the Middle East are starting to cause issues for Danish homeowners.
“Developments in the Middle East dictate interest rates, and there are no developments in that situation, which is the problem,” the mortgage provider’s chief analyst Sune Malthe-Thagaard told DR.
The situation is, DR reports, especially bad for people who are planning to buy a new home, as well as those looking to refinance their existing mortgages.
How do Danish mortgages work?
Under Denmark’s lending system, home buyers can borrow up to 80 percent of the value of the house as a so-called mortgage loan, while the rest takes the form of a mortgage, which is a separate loan borrowed directly from the bank.
Together, the two loan types make up Denmark’s unique mortgage credit system, which is a market-driven approach to financing mortgages.
When a borrower takes out a mortgage, the mortgage lender (mortgage institution) issues bonds in the same amount as the loan. These bonds are then sold at auction to investors, providing the lender with the funds to disburse the loan.
Banks are responsible for assessing applicants and approving mortgages, but the funding for the largest portion of the mortgage is borrowed from the mortgage institution via the bank.
Why is this an issue now?
Interest on 30 years mortgage credit loans have risen to more than four percent, which will come as a shock for property owners whose loans are coming up for their five-year interest rate renewal, Malte-Thagaard told DR.
According to Malthe-Thagaard, there are 15,000 homeowners in Denmark whose interest rate is set to change on July 1st, and 11,000 of them have what is known as an F5 mortgage.
What are F3 and F5 loans?
Danish F3 and F5 loans are adjustable-rate mortgages where the interest rate is fixed for three years (F3) or five years (F5) before resetting based on market rates.
These loans typically offer lower initial interest rates compared to long-term fixed-rate mortgages, but borrowers face the risk of payment increases if rates rise after the reset period.
Five years ago, F5 loans had an interest rate of 0.06 percent. Now, their rate is around 3 percent. That means that for every million kroner you’ve borrowed, your interest rate payment will go up by 1,830 kroner, DR reports.
“Many homeowners with an F5 loan have swapped to F3 or F1 loans in recent years, because they can get a slightly low interest rate, and they also probably have an expectation that when their interest rate renews in between one and three years, it will be a bit lower,” Malthe-Thagaard told DR.
What do Danish interest rates have to do with the Hormuz strait?
The Hormuz Strait has been blocked since the end of February, which has pushed up oil prices as much of the world’s oil supply needs to pass through the strait on its way to consumers.
High oil prices make inflation more likely, which means that central banks across the world are pushing up their key interest rates to keep inflation at bay.
This in turn has led mortgage providers to raise their interest rates.
