Investment Ideas / Debt and mortgage in Denmark

Denmark and the Netherlands have some of the highest household debt ratios in the world, reflecting in part low incentives to pay down debt and build housing equity, given significant saving for retirement via the accumulation of assets in fully-funded pension schemes, among other factors.

The larger the debt is, the higher the expenses will be for interest and principal payments. Consequently, a large debt can put a strain on household finances, especially if the household is hit by unpredicted events such as unemployment or illness. The combination of higher debt and increased use of adjustable-rate loans also means that household finances have become more sensitive to fluctuations in interest rates than previously.

Analyses by Danmarks Nationalbank and others show that the vast majority of Danish households have robust finances and are resilient to an interest-rate hike or a prolonged period of unemployment. Most families have sufficient scope in their budgets to be able to handle e.g. rising interest expenses at their current income levels. Others have savings that they can eat into if their incomes are not quite sufficient, even for longer periods.

The share of households with robust finances is particularly high among those with mortgage debt. It is relevant to focus on this group, as mortgage debt accounts for the lion’s share of household debt. The ability and willingness of households to service their mortgage loans are very robust, and even among families with squeezed finances only very few fall into arrears.

At the macroeconomic level, this indicates that even a severe setback in the Danish economy would lead to only a very limited increase in the number of households that do not service their mortgage debt. One of the reasons is that mortgage debt is typically the last debt item on which a family chooses to default. For other loans, including bank loans, the number of households in arrears will presumably rise much more if the Danish economy is hit by a severe setback.

Debt handling and default

High household debt could pose direct risks to financial stability if the number of mortgage loan defaults rises sharply in the face of adverse shocks. In practice, however, despite the high level of household debt, the household arrears ratio remains relatively low in Denmark, after rising slightly during the global financial crisis. The low level of arrears reflects the strong legal and regulatory framework in Denmark: The LTV ceiling of 80 percent on new mortgage loans limits lender losses in the event of a default. In addition, mortgage loans are full recourse backed by quick repossession and forced sale procedures.

A mortgage loan is considered in default after 3 ½ months of non-payment, and forced sale procedures are initiated unless alternative workout procedures are agreed with the borrower. It typically takes less than nine months from the payment becoming overdue to the property being sold. This also contributes to limiting mortgage banks’ potential losses. If the sales of the property do not sufficiently cover the mortgage bank’s claim, the uncovered claim remains as an unsecured claim against the borrower.

A series of papers by the Danmarks Nationalbank using Danish household micro data have demonstrated that gross debt is highly concentrated among high income families as well as households with larger financial assets. The Nationalbank’s stress tests have also shown that most households are resilient to interest rate shocks and the number of families in arrears remains relatively low even in stress scenarios. Overall, these studies have concluded that elevated household debt does not directly threaten financial stability.


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