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January 23rd, 2013

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The homeowners who ten years ago became the first people in the country to take advantage of a new kind of mortgage, which gave them the option of only making interest payments over the first decade, are going to try something new in the coming months: paying back the principal – if they can. For these homeowners, the end of these interest-only periods means drastically higher payments – about six times their current monthly payment – not only because they need to start paying back the principal of their loans, but also because they will have ten years less to do it.

About 5,600 afdragsfrie mortgages kick in this year, but many more will follow in the years to come.

"We are not worried about 2013,” Christian Hilligsøe Heinig, the chief economist with mortgage lender Realkredit Denmark, told Jyllands-Posten newspaper. The first real increases come in 2014 and 2015, and we will advise customers of the options they have."

The mortgages, which offered an optional ten-year period of paying only the interest, were introduced in 2003. With the end of those periods nearing, considerable focus has been placed on what might happen when people have to start paying the full amount.

Had housing prices continued to rise, homeowners would be in less of a fix, since they could have refinanced and  taken out another afdragsfrie mortgage. But with precipitous drops in recent years, some homes are worth considerably less than what the owners bought them for, leaving mortgage-holders with one option: start repaying.

Nordea Kredit, a mortgage lender, has about 5,000 afdragsfrie mortage due to enter the principal repayment phase next year, while Realkredit Denmark has 11,000 on its books.

Realkredit Denmark said in a statement that most of the homeowners who are due to start making their principal payments this year had sound enough finances to refinance their loans should they choose. 

"These households generally have solid finances and relatively high incomes. Many will be able to establish new interest-only loans," read the statement. Many such homeowners also benefited by taking out their mortgages before the housing prices really exploded, meaning their properties have maintained their value.

The interest-only loans, coupled with a freeze on property taxes, are blamed for created a housing bubble between 2000 and 2005 that eventually burst. While foreclosures have risen in the wake of the collapse, the wave of mortgages that are about to enter their principal payment phase could have an even greater impact, economists worry. 

Lenders have been criticised for inflating the bubble by not adhering to guidelines that required homeowners to prove they could repay the full amount in order to qualify for the afdragsfrie mortgage. This disregard opened up the market to hordes of new buyers. 

The lawmakers who approved the introduction of the afdragsfrie mortgage have also come under attack for their role. But the then PM, Anders Fogh Rasmussen (Venstre), the current secretary general of NATO, said in a recent interview that the responsibility lies in the hands of the lenders and homeowners, not with the economic policies put in place between 2001 and 2009, while he was PM.

"People are responsible for their own decisions regarding what loans they took," Rasmussen told Jyllands-Posten newspaper. "We must have confidence that individuals and families take steps that are possible and reasonable within their own financial framework. I am not a nanny politician who believes that you should hold people by the hand. I believe in personal responsibility.”

Magnus Heunicke, a spokesperson for Socialdemokraterne, which leads the current government, expressed disbelief at Rasmussen’s attempt to distance himself from his own policies.

"It's very convenient for him to talk about personal responsibility,” Heunicke told Jyllands-Posten. “All of us here back in Denmark wish that the government then had intervened and subdued the fire; instead, he poured on more petrol.”

According to Heunicke, Rasmussen’s policies were “deeply irresponsible” and amplified the effect of the financial crisis on Denmark.

Rasmussen, for his part, said that he feels that his policies helped the country weather the crisis better than many other countries.

"We did not just throw money around − we used it to reduce debt,” he said. “Of course we were affected by the crisis, but we started out in a stronger position because we had cut the debt.”