5 ms·

In the Danish system, each mortgage is backed by a matching bond. Thus, mortgage holders have two ways to pay off their mortgage: 1) pay the monthly payments or

In the Danish system, each mortgage is backed by a matching bond. Thus, mortgage holders have two ways to pay off their mortgage: 1) pay the monthly payments or 2) buy the matching bond and, in effect, extinguish the mortgage. The latter option is valuable because when interest rates rise, the price of mortgages fall.

okeuro49 2y ago
> The latter option is valuable because when interest rates rise, the price of mortgages fall. Can you explain how that works under this system?
- tukantje 2y ago
  Here is how I hear it personally; When interest rates rise, demand for other assets go down, which would include these mortgage bonds; which means it is now cheaper to buy your mortgage out due to reduced demand. Essentially your mortgage is now dynamically priced, in terms of extinguishing it; by the market. If so - sounds brilliant actually. Especially because this would correctly price the change in time value of money changes - without such a system, people are incentivised to pay as slowly as possible when the interest rate on their loan is lower than the central bank rate.
- xkbarkar 2y ago
  In Denmark, with a realkredit loan. The loan is funded by bonds that investors buy. The realkredit institution manages these loans and makes sure the investors get paid back. The refinancing part is essentially if the interest rates go up I can ask to pay those higher interest and bit more per month and then my total mortgage debt goes down. In some cases you can save a lot of money by doing that. It depends. Also monthly payment is misleading. You pay quarterly not monthly. So its calculated maybe 10.000DKK monthly but you will always pay 30.000DKK quartely. Don´t know why its always described as monthly in Denmark when no one pays realkredit on a monthly basis. It could be because the mortgage you can get is based on a monthly salary. But I am just guessing. No idea. Its a good system though. IMHO Denmark is very much a delusional capitalist country with socialist tax rates but this realkredit system is really superb.
  - barrenko 2y ago
    Can a foreigner buy these 'realkredits'?
    - ErikBjare 2y ago
      Yes, but I'm not sure why you would.
- CookiesOnMyDesk 2y ago
  He means that the price of the bonds backing the mortgage fall. Since the bonds are fixed interest, when interest rates rise, new bonds at a higher interest rate are more profitable than the old bonds at a lower interest rate. As such the free market price of the old bonds will drop to until the selling-at-a-loss reaches an equilibrium with the expected increased profit from higher interest rates of the new bonds over the lifetime of the bond. This lets the loan taker buy back their own bonds for less than what they were paid (the loaned amount) when the bonds were issued.
  - dmoy 2y ago
    Yup exactly this. If you go to "normal" bonds, there's many articles describing the idea, e.g. https://www.schwab.com/learn/story/what-happens-to-bonds-when-interest-rates-rise https://www.schwab.com/learn/story/what-happens-to-bonds-whe... But basically: Say a bond was originally worth say $100 and generated $10 of income in time T (10%). If interest rates rise so that $100 will now generate $20 (20%), then the original bond is worth less to a buyer. If we ignore the time delta, that bond would only really be worth $50 ($50 to generate $10 is the same 20%), so it's half as valuable. (The time change would bring it somewhere in between, depending on how long has elapsed).
SoftTalker 2y ago
Instead of the complexity of issuing these bonds, would it not be a lot simpler to just allow borrowers to buy back their mortgage at its current value, which is what any other buyer of that loan would do. Mortgage loans are bought and sold all the time, for their current value. Just allow the original borrower be able to do that.
- s1artibartfast 2y ago
  Both are forcing the bank to take action, but I think that switching like for like is less of an imposition than a forcing the bank to sell. It is interesting that banks dont already offer this for a fee. Im not too knowledgeable on the topic, but wonder if it has do with how mortgages are bundled, and the cost/paperwork of unwinding that.
  - fshbbdssbbgdd 2y ago
    The fact that someone who needs to sell will pay back the principal is valuable to the bank. If a bank starts offering the option to get out of the loan at a lower price, it would impair the value of that loan. The only way to make this happen would be to include it in the original terms of the loan (where this feature would be worked into the market math that sets the interest rate) or if the government changes the rules (which would result in a hole in balance sheets as the value of the debt falls).
    - s1artibartfast 2y ago
      Correct, there is some additional value from the upside that mortgage holders may need pay in full to terminate. However, this upside should be priced into the Mortgage price on the secondary market as well. there are other factors as well, like holders of mortgages may care about much more than their market value. They are balancing time returns, risks, and their portfolio of investments.
- munch117 2y ago
  How would the current value be determined? The lender has no incentive to offer you a competitive price, when your alternative is to pay the loan in full. The point of the Danish system is that it's a market system through and through. No one needs to twist the arms of lenders to make them "allow" something.
NaOH 2y ago
Don’t plagiarize. https://marginalrevolution.com/marginalrevolution/2024/06/more-on-the-danish-mortgage-system.html https://marginalrevolution.com/marginalrevolution/2024/06/mo...
xtiansimon 2y ago
> “buy the matching bond” I don’t get it. If you could afford to buy out the bond, then why would you need a mortgage in the first place??
- kkoste 2y ago
  Well. First of. Maybe you didn't have the money at that particular time. In Denmark every single mortage has a matching bond. I'll try to explain it as well as I can. When you make a mortgage loan you can have either a fixed rate or variable rate. Depending on which you choose the exchange-rate differs. It hovers around 100. When you make a loan you would want that to be 100 or more. For example if the exchange-rate was 101 you would receive 101 kroners for every 100 kroner you loan. A dream scenario. But more realistically it is probably closer to 99. Mortgages is a boring thing. But extremely interesting when it comes to your own loan. The key to take away here is the following: When the mortgage rates are high the bonds are less valuable. When the mortgage rates are low the bonds are more valuable. Now let's take an example. I take 1.000.000 DKK loan for a house at an exchange-rate of 100.00DKK. Meaning I now owe the mortgage institute 1.000.000 DKK. The mortgage security bond for my house is still 100.00 DKK at this time. Meaning if I want to payout my loan. I have to pay 100.00 DKK to pay off 100.00DK. But for if the rates are high then the exchange-rate might be 95. In which case I can then go down to the bank and say 'I want out of my loan'. The bank will then say 'Okay. You still owe the mortgage institution 1.000.000 and since the exchange-rate is 95 right now. You then have to pay 950.000 plus some fees'. The bank will then buy the underlying bond for me and handle the rest. In general we have many options when it comes to mortgages. It all involves refinancing: * If the rate falls you can do a down conversion. You replace your old loan with a new one with lower rate. You might have to pay more to payout the loan since the exchange-rate will certainly be higher. * If the rate falls you can do an up conversion. Similar to the example before. But this time you replace the loan. You get a higher rate, but you might "pay off" a significant amount. Hope that sort of clears it up.
  - kkoste 2y ago
    And then there is the 'slanted' conversion where you refinance from a fixed mortgage to a variable mortgage. Or vice versa. In all cases it depends on your situation. How many years are left on the loan. Have your disposable income changed such that you can pay off more in which do you want to change the loean from a 30 year loan to 10 year loean instead. It takes some serious thinking.

okeuro49 2y ago

> The latter option is valuable because when interest rates rise, the price of mortgages fall. Can you explain how that works under this system?

tukantje 2y ago
Here is how I hear it personally; When interest rates rise, demand for other assets go down, which would include these mortgage bonds; which means it is now cheaper to buy your mortgage out due to reduced demand. Essentially your mortgage is now dynamically priced, in terms of extinguishing it; by the market. If so - sounds brilliant actually. Especially because this would correctly price the change in time value of money changes - without such a system, people are incentivised to pay as slowly as possible when the interest rate on their loan is lower than the central bank rate.
xkbarkar 2y ago
In Denmark, with a realkredit loan. The loan is funded by bonds that investors buy. The realkredit institution manages these loans and makes sure the investors get paid back. The refinancing part is essentially if the interest rates go up I can ask to pay those higher interest and bit more per month and then my total mortgage debt goes down. In some cases you can save a lot of money by doing that. It depends. Also monthly payment is misleading. You pay quarterly not monthly. So its calculated maybe 10.000DKK monthly but you will always pay 30.000DKK quartely. Don´t know why its always described as monthly in Denmark when no one pays realkredit on a monthly basis. It could be because the mortgage you can get is based on a monthly salary. But I am just guessing. No idea. Its a good system though. IMHO Denmark is very much a delusional capitalist country with socialist tax rates but this realkredit system is really superb.
- barrenko 2y ago
  Can a foreigner buy these 'realkredits'?
  - ErikBjare 2y ago
    Yes, but I'm not sure why you would.
CookiesOnMyDesk 2y ago
He means that the price of the bonds backing the mortgage fall. Since the bonds are fixed interest, when interest rates rise, new bonds at a higher interest rate are more profitable than the old bonds at a lower interest rate. As such the free market price of the old bonds will drop to until the selling-at-a-loss reaches an equilibrium with the expected increased profit from higher interest rates of the new bonds over the lifetime of the bond. This lets the loan taker buy back their own bonds for less than what they were paid (the loaned amount) when the bonds were issued.
- dmoy 2y ago
  Yup exactly this. If you go to "normal" bonds, there's many articles describing the idea, e.g. https://www.schwab.com/learn/story/what-happens-to-bonds-when-interest-rates-rise https://www.schwab.com/learn/story/what-happens-to-bonds-whe... But basically: Say a bond was originally worth say $100 and generated $10 of income in time T (10%). If interest rates rise so that $100 will now generate $20 (20%), then the original bond is worth less to a buyer. If we ignore the time delta, that bond would only really be worth $50 ($50 to generate $10 is the same 20%), so it's half as valuable. (The time change would bring it somewhere in between, depending on how long has elapsed).

SoftTalker 2y ago

Instead of the complexity of issuing these bonds, would it not be a lot simpler to just allow borrowers to buy back their mortgage at its current value, which is what any other buyer of that loan would do. Mortgage loans are bought and sold all the time, for their current value. Just allow the original borrower be able to do that.

s1artibartfast 2y ago
Both are forcing the bank to take action, but I think that switching like for like is less of an imposition than a forcing the bank to sell. It is interesting that banks dont already offer this for a fee. Im not too knowledgeable on the topic, but wonder if it has do with how mortgages are bundled, and the cost/paperwork of unwinding that.
- fshbbdssbbgdd 2y ago
  The fact that someone who needs to sell will pay back the principal is valuable to the bank. If a bank starts offering the option to get out of the loan at a lower price, it would impair the value of that loan. The only way to make this happen would be to include it in the original terms of the loan (where this feature would be worked into the market math that sets the interest rate) or if the government changes the rules (which would result in a hole in balance sheets as the value of the debt falls).
  - s1artibartfast 2y ago
    Correct, there is some additional value from the upside that mortgage holders may need pay in full to terminate. However, this upside should be priced into the Mortgage price on the secondary market as well. there are other factors as well, like holders of mortgages may care about much more than their market value. They are balancing time returns, risks, and their portfolio of investments.
munch117 2y ago
How would the current value be determined? The lender has no incentive to offer you a competitive price, when your alternative is to pay the loan in full. The point of the Danish system is that it's a market system through and through. No one needs to twist the arms of lenders to make them "allow" something.

NaOH 2y ago

Don’t plagiarize. https://marginalrevolution.com/marginalrevolution/2024/06/more-on-the-danish-mortgage-system.html https://marginalrevolution.com/marginalrevolution/2024/06/mo...

xtiansimon 2y ago

> “buy the matching bond” I don’t get it. If you could afford to buy out the bond, then why would you need a mortgage in the first place??

kkoste 2y ago
Well. First of. Maybe you didn't have the money at that particular time. In Denmark every single mortage has a matching bond. I'll try to explain it as well as I can. When you make a mortgage loan you can have either a fixed rate or variable rate. Depending on which you choose the exchange-rate differs. It hovers around 100. When you make a loan you would want that to be 100 or more. For example if the exchange-rate was 101 you would receive 101 kroners for every 100 kroner you loan. A dream scenario. But more realistically it is probably closer to 99. Mortgages is a boring thing. But extremely interesting when it comes to your own loan. The key to take away here is the following: When the mortgage rates are high the bonds are less valuable. When the mortgage rates are low the bonds are more valuable. Now let's take an example. I take 1.000.000 DKK loan for a house at an exchange-rate of 100.00DKK. Meaning I now owe the mortgage institute 1.000.000 DKK. The mortgage security bond for my house is still 100.00 DKK at this time. Meaning if I want to payout my loan. I have to pay 100.00 DKK to pay off 100.00DK. But for if the rates are high then the exchange-rate might be 95. In which case I can then go down to the bank and say 'I want out of my loan'. The bank will then say 'Okay. You still owe the mortgage institution 1.000.000 and since the exchange-rate is 95 right now. You then have to pay 950.000 plus some fees'. The bank will then buy the underlying bond for me and handle the rest. In general we have many options when it comes to mortgages. It all involves refinancing: * If the rate falls you can do a down conversion. You replace your old loan with a new one with lower rate. You might have to pay more to payout the loan since the exchange-rate will certainly be higher. * If the rate falls you can do an up conversion. Similar to the example before. But this time you replace the loan. You get a higher rate, but you might "pay off" a significant amount. Hope that sort of clears it up.
- kkoste 2y ago
  And then there is the 'slanted' conversion where you refinance from a fixed mortgage to a variable mortgage. Or vice versa. In all cases it depends on your situation. How many years are left on the loan. Have your disposable income changed such that you can pay off more in which do you want to change the loean from a 30 year loan to 10 year loean instead. It takes some serious thinking.