(Bloomberg) — Danish households, who carry the biggest gross debt loads of any population in the rich world, look to have turned a corner.
Danes repaid their home loans at the fastest pace in history last year, according to the Association of Danish Mortgage Banks. At the same time, record-low interest rates and higher fees on riskier loans are driving more borrowers over to fixed-rate mortgages, which now cost as little as 2 percent for 30 years. The developments have helped banks meet demands to cut risks.
“We’ve been asked by regulators, the central bank, ratings companies to go in this direction,” Ane Arnth Jensen, the association’s director, said in an interview on Friday. “Now those who want to have risk have to pay for that.”
After years of warnings from ratings companies and the central bank that Denmark’s $450 billion mortgage-bond market was growing less stable amid an over-reliance on adjustable-rate loans and products that delay amortization, the industry and borrowers have emerged looking stronger than they did just half a decade ago.
Last year, borrowers repaid 3.87 percent of amortizing loans, according to the mortgage association. That compares with 2.74 percent in 2008, the year Denmark’s real estate bubble burst, eventually taking dozens of community banks with it.
“That is a relatively high increase,” Jensen said.
Two things are driving the figure higher, she said. Part of the increase comes from borrowers who began amortizing after a 10-year interest-only grace period ended. Most comes from lower interest rates, meaning a bigger share of the fixed payment that borrowers with adjustable-rate loans is principal, she said.
“It’s an advantage for the borrower that you actually can bring your loan down at a faster speed,” Jensen said. “You save some on interest payments on the one hand, and even though you’re payingmore on principal, that’s money you’re paying yourself.”
The world’s biggest mortgage market per capita has been buoyed by a period of unprecedented monetary easing. Denmark, which has spent the past three months fighting back attacks against the krone’s peg to the euro, has cut its key rate to minus 0.75 percent. Mortgage bonds with maturities as long as three years trade at negative yields, according to data compiled by Bloomberg.