The Danish mortgage credit model

The Danish mortgage system has survived since 1795, in large part due to the conservative lending policies of the Danish mortgage providers. Despite several occasions of economic and political turmoil, including the bankruptcy of the Kingdom of Denmark in 1813 and the depression of the 1930s, there is no record of a mortgage bank defaulting on its payments.

This is mainly attributable to the legislative framework which, from an early stage in the development of the market, has put great emphasis on the protection of the mortgage bond investor by imposing strict limits on the risk taking of the mortgage banks. This has led to the conservative lending practises of the mortgage banks. 

The Danish mortgage credit system is characterized by the following;

• the borrower's real property is mortgaged as collateral for the loan,
• loans are granted within the framework of the Mortgage Credit Act,
• the loans are financed by the issuance of covered bonds subject to the legally required Balance Principle,
• the loans are retained on the issuing mortgage banks' balance during the whole lifetime of the loan,
• loan terms including interest rate and method of prepayment are set with direct reference to the covered bonds issued to fund the loan,
• the interest rate is market-to-marked and transparent,
• the borrower can any time prepay the loan. The payment to the mortgage bank takes place as fees appearing clearly to the borrower.

Through the long-standing tradition as financial market players specialized in the granting of long-term loans against mortgages on real property, the mortgage banks have achieved a central position in the Danish economy. The significant dual role of the mortgage bonds - as an effective funding instrument on the one hand, and a secure investment on the other - has given the bonds a central positioning in the Danish capital market, and in the longer term also in a wider international perspective.