Analyses focus on current issues of particular relevance to Danmarks Nationalbank’s objectives. The analyses may also contain Danmarks Nationalbank’s recommendations. They include our projections for the Danish economy and our assessment of financial stability. Analyses are targeted at people with a broad interest in economic and financial matters.
Economic implications of interest-only mortgages combined with high leverage
Interest-only mortgages are common among Danish homeowners, which sets Denmark apart from most other countries. Danish households also have high levels of debt by international standards. While interest-only mortgages can be useful for some homeowners to smooth out consumption and savings over their lifetime, the combination of interest-only mortgages and high loan-to-value ratios can pose a systemic risk to the Danish economy, which could materialise during a severe recession with a large decline in house prices.
Key messages
Why is it important?
Danmarks Nationalbank works to ensure a robust economy in Denmark, including stability in the financial sector. Widespread use of interest-only mortgages affects the economy in several ways. Interest-only mortgages can stimulate economic activity through private consumption, but can also lead to increased household debt, which expose credit institutions to losses in the wake of severe economic downturns with falling house prices. Those losses can spread across the financial sector and to the economy as a whole, amplifying the depth and length of a recession.
Main chart
Interest-only mortgages are still common in Denmark
Note:
The chart shows household mortgages in Denmark, divided into mortgages with amortisation and interest-only mortgages.
Source:
Danmarks Nationalbank.