Market-based prepayment 

The Danish mortgage credit system offers a market-based repayment system. This is linked to the match-funding in the balance principle. It is therefore possible for borrowers to extraordinarily prepay their mortgage credit loans – and with full transparency in prices and terms. This is done by purchasing the underlying bonds.

Callable loans may be prepaid at par (100) or close. This is why Denmark has a large re-mortgaging market. Home owners will prepay their existing loans and change to other mortgage credit loans when this is financially beneficial. The financial advantages could be either lower repayment amounts or lower remaining debt and the advantages may be obtained if the trend in interest rates moves in one particular direction.
 

Housing prices will typically fall when interest rates go up. Interest increases will trigger a fall in prices of the bonds underlying the fixed-interest loan, which makes it possible for home owners to reduce their remaining debt, although the term payments will typically be higher, as the loans are remortgaged into loans with a higher interest rate.
 

This equity protection benefits the individual home owner – but also the financial stability and the economy in times of recession.
 

In other European countries borrowers will often have to defray considerable costs to prepay their home loan. It is not unusual that lenders have a claim to compensation for lost earnings. Calculations show that prepayment of a 10-year fixed-interest 6 pc loan at EUR 100,000 (approx. DKK 750,000) will trigger a compensation that the borrower will have to pay to the lender of around 1.5 pc of the debt in Belgium and up to approx 10 pc in Germany. These calculations are from the EU Commission White Paper on the harmonization of European Mortgage Credit Markets.
 

Furthermore, the calculation of lost earnings can be difficult to make. It normally depends on the current interest level. Borrowers in other countries do not always have full transparency of the costs in connection with the funding of the loan. Therefore borrowers will have to negotiate on a non-transparent basis.  It is different in the Danish mortgage credit market. A Danish home owner does not have to negotiate with the mortgage bank that granted the loan in order to prepay it. Any mortgage bank can do it, because the transaction is done in an open securities market. We are not familiar with corresponding examples that borrowers in other countries may extraordinarily prepay their loans – at relatively low costs – with full transparency – and without necessarily having to enter into a negotiation with their credit institute.