In November 2017, the Danish government determined that it would start funding social housing in Denmark. This is done using government-guaranteed covered bonds issued in separate so-called capital centres. The capital centres are the legal entities in which the bonds issued and the loans provided are linked.
All bonds issued in the social housing capital centres are currently sold to Danmarks Nationalbank.
Government guarantees reduce interest expenses
Before November 2017, social housing was mainly financed through mortgage bonds comprising mortgage loans for both social and private sector housing. In other words, social housing was financed on the same terms and conditions as those offered to private homeowners. By transferring mortgage loans for financing social housing to a separate capital centre, the government can guarantee the bonds. This reduces the financing costs as the creditworthiness of the central government is high.
When government-guaranteed covered bonds are issued via a separate capital centre, the series are, however, only built up to moderate volumes as the underlying pool of loans is smaller. In addition, the loans are distributed on a number of mortgage credit institutions.
In addition to interest rate expenses being lower, the government can achieve further savings by purchasing the bonds and funding the purchases via issuance of government securities. This is because investors are willing to pay a premium for the higher liquidity of government securities. Effectively, this corresponds to issuance of mortgage bonds in the market being substituted by increased sales of government bonds.