The analysis examines how interest-only mortgages combined with high leverage ratios influence consumer behaviour, housing prices and home financing in Denmark. In this way, the knowledge base is expanded in three central areas where interest-only mortgages play a structural role in the Danish economy. The analysis does not contain any new or altered recommendations from Danmarks Nationalbank.
Danmarks Nationalbank has examined the Danes' use of interest-only mortgages in an analysis titled ‘Economic implications of interest-only mortgages combined with high leverage'.
Stricter regulation and credit institutions’ lending policies have reduced the extent of interest-only mortgages among less financially robust homeowners since the financial crisis, thus increasing the robustness of the Danish economy. Today, however, 29 per cent of housing loans are characterised by being interest-only and granted to relatively highly leveraged homeowners. The current lending rules do not prevent interest-only mortgages from becoming more widespread in the future.
Interest-only mortgages continues to be widespread in Denmark
Interest-only mortgages can help homeowners smooth consumption and savings over their lifetime. The analysis shows, among other things, that homeowners with high leverage have historically used interest-only mortgages to even out consumption by increasing spending by kr. 3 billion per year. This corresponds to less than 0.3 per cent of total private consumption. Thus, interest-only mortgages play a minor role in Danish economic activity. If the same homeowners had instead paid down their mortgage debt, it would have reduced the most risky housing debt significantly, according to the new analysis.
Interest-only mortgages may cause greater fluctuations in housing prices and increase household indebtedness. Combined with high leverage, interest-only mortgages increases the risk of mortgage credit institutions and banks suffering loan losses when the economy is hit by severe downturns and falling housing prices. Such a risk becomes systemic if the consequences can spread across the financial sector and to the overall economy.
Limiting access to interest-only mortgages for the most highly leveraged homeowners, as recommended by the Danish Systemic Risk Council, would contribute to a structural improvement of the Danish economy and can simplify a complex set of lending rules.