About the Danish mortgage credit system
mortgage credit institutions in Denmark have gained a central position in the Danish economy thanks to their long-standing activity as financial enterprises specialising in granting loans against mortgages on real property, and the Danish system is considered very safe when it comes to the ability to meet obligations towards bondholders.
Pass-through system where bonds and loans have to balance
Two main principles are characteristic of the Danish mortgage credit system:
- All lending is secured on real property and financed through the issuing of bonds.
- The mortgage credit institutions have no influence on the yield on the loans granted, which is entirely determined by the market
This section offers an overview of the Danish mortgage credit system.
The legal provisions particular to the Danish mortgage credit system focus on several areas, which aim at protecting the mortgage bond investors:
- Danish mortgage credit institutions are by law prevented from undertaking any substantial currency, liquidity or interest rate risk. This is called the balance principle.
- Danish mortgage credit institutions are required to maintain a capital adequacy ratio of at least 8% of their risk-weighted assets.
- Regulation on loan-to-value limits, maturities and repayment profiles
- Holders of Danish mortgage bonds hold a preferential claim should a mortgage credit institution be wound up by the courts (although such compulsory winding-up has never occurred).
- The legal principles are supported by the Danish Land Registration and Cadastral System.
- An efficient compulsory sale system
- Danish mortgage credit institutions are supervised by the Danish Financial Supervisory Authority (in Danish: Finanstilsynet).
Danish mortgage credit institutions are subject to the joint financial sector legislation as set out in the Danish Financial Services Act/Financial Business Act (in Danish: Lov om finansiel virksomhed), which contains provisions about best practises, client information, ownership, management, consolidation and financial reporting, capital requirements etc.
Read the full text of the Financial Services Act here (from the website of the Danish Financial Supervisory Authority):
The granting of mortgage loans in Denmark is regulated by the Danish Mortgage Loans and Mortgage Bonds Act and executive orders issued pursuant to the Act. The specifics of the Act and the executive orders are explained in the following sections.
Read more about the history of the Danish Mortgage Credit Act
Read the full text of the Mortgage Loans and Mortgage Bonds Act here (from the website of the Danish Financial Supervisory Authority):
The balance principle in the Mortgage Loans and Mortgage Bonds Act regulates the financial risk of the mortgage credit institution resulting from differences in payments between loans and funding, fluctuations in interest and exchange rates and the use of financial instruments.
The principle states that the payments on the debtor side and the creditor side of a mortgage credit institution must balance as a whole within certain limits. This is achieved by issuing a bond or a portfolio of bonds each time a loan is granted.
Put very simplistically, the risk of the mortgage credit institution is limited to credit risk, i.e. the risk on the borrower's ability to meet his obligations.
According to the Financial Services Act, the capital base of a mortgage credit institution must at all times amount to at least 8% of the institute's risk-weighted assets and off-balance sheet items.
If a mortgage credit institution fails to meet the requirement of capital base, the Danish Financial Supervisory Authority (DFSA) may set a time limit within which the requirements must be met. If the institute fails to meet the requirements within this period, the DFSA may suspend the its license to undertake mortgage financing activities. The mortgage credit institution will, in such a situation, continue to receive instalments, coupons and fees on the existing mortgage loans and pay instalments and coupons on the relating mortgage bonds.
If a mortgage credit institution should be declared bankrupt, bondholders will rank prior to all other creditors regarding the right to repayments on the mortgages and to the assets held in the reserve funds of the mortgage credit institution. No claims of other creditors will be satisfied until the bondholders have received what is due to them.
Since the birth of the Danish mortgage credit system in 1797, no institution has ever gone bankrupt. Only in a very few cases in the 200-year history have the payments to the investors been delayed. The last example dates back to the 1930s.
The Mortgage Loans and Mortgage Bonds Act stipulates limits on loan-to-value (LTV), maturities and repayment profiles.
Mortgage loans can be raised for various purposes: for new construction, for the purchase of an existing property, for remortgaging (refinancing) and for other purposes (top-up loans).
The mortgage credit institutions must value all properties individually and assess the creditworthiness of each prospective borrower. As a main principle, a mortgage credit institution may grant a loan up to the statutory limit. The lending limits vary between different categories of property. The limits are shown in the table below.
|Private residential property|
|Vacation homes/weekend cottages|
|Residential rental property|
|Office and shop property|
|Loans w/guarantee from local government|
80 - 100
Mortgage credit institutions may not grant loans exceeding the limits, even if the borrower is extremely creditworthy. The basic idea is that it is easier to assess the long term value of a property than the long term creditworthiness of a prospective borrower.
A prerequisite for the effectiveness of the Danish mortgage credit system is the protection of the mortgage credit institutions' rights on the borrower's real property. To this end, rights and claims relating to a property in Denmark are registered with the Danish Land Registration System (in Danish: Tinglysningssystemet).
Any plot of land in Denmark is mapped in the Cadastral System (in Danish: Matrikelsystemet) designated with a title number. The title number is used in the Land Registration System, where the rights and claims on a title number are ordered by rank. The ranking is based on the principle of "first in, first right", and in the event of the property owners default on a claim, the ranking directs the order of execution.
The ranking order of the mortgages on a given property must be set out in the Land Register in which registration is made subject to a judicial examination. Any person who suffers a loss as a consequence of errors committed within the Land Registration System may claim compensation from the Danish Treasury.
The Danish system of compulsory sale ensures that mortgage credit institutions can enforce their rights if the borrowers cannot pay. The mortgage credit institution may put the property up for forced sale in case the borrower fails to pay.
A forced sale (auction) will be carried through by the enforcement court, which is part of the court system in Denmark. The mortgagees will be covered by the bid sum at the auction in the ranking order registered with the Land Registration System.
The forced sale system in Denmark is highly effective, and it typically takes no more than six months from the time when the borrower defaults on the loan until a forced sale can be carried through.