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Refinancing fixed-rate mortgages and homeowners' financial resilience
Almost half of mortgage lending to homeowners in Denmark consists of 30-year fixed-rate loans. The loans are callable, so homeowners can redeem their loan and take out a new one if, for example, they want to refinance at a lower rate if interest rates fall. We calculate a financial incentive for each fixed-rate mortgage and show that only half of the loans with a refinancing incentive are actually refinanced. This indicates that more homeowners could have strengthened their financial resilience by responding to the incentive, especially among homeowners with lower incomes.
Key messages
Why is it important?
Interest rate changes, both in Denmark and abroad, affect the interest rate on the callable 30-year mortgage bonds that underpin almost 940,000 Danish mortgages. These homeowners can exercise their prepayment option and refinance their loans when interest rates fall sufficiently, thereby reducing their interest expenses. It is therefore important to quantify the number of fixed-rate mortgages with a financial incentive to refinance in order to assess how interest rate developments could affect the macroeconomy and the financial resilience of homeowners.
Main chart
Financial resilience can be strengthened if more homeowners refinance when they have a financial incentive
Note:
The chart shows actual debt service-to-income (DSTI) and the potential savings calculated as the difference between the actual and the counterfactual debt service-to-income for homeowners who were incentivised to refinance during 2019 at an 30-year mortgage rate of 1 per cent, but who did not refinance in 2019 to 2020. The counterfactual debt servicing ratio is calculated by refinancing to a coupon rate of 1 per cent. Income quintiles are calculated as net income for the household. The debt servicing ratio includes interest and instalment payments as a share of net income measured before interest payments.
Source:
Own calculations based on register data from Statistics Denmark.