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Denmark Out of The Debt Trap

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Denmark has finally been able to break out from the debt trap. With the improvement of amortization rates, the world’s most severely indebted households have been saved from the buildup of further debts.

According to the Danish Mortgage Bankers’ Federation, issuing of interest-only loans is now in its highest point. Echoing a similar view, Danske Bank A/S, Denmark’s largest lender, predicts the decline of non-amortizing loans. Jan Oestergaard, senior analyst at Danske from Copenhagen, said in an interview that the share of interest-only loans will most probably see a decrease, but it all depends on the interest rates in the following months.

Loans that are interest-only provide users with a grace period of up to 10 years for the returning of the borrowed sum. The mortgage market of Denmark, which is valued at almost 500 billion dollars, comprises of almost 50 to 55 percent of the interest-only loans. This has had a destabilizing effect on Denmark’s home finance market, which has also got the largest per capita income in the world. Denmark has been urged by the Organization for Economic Cooperation and Development to create a policy that will help in the reduction of the gross household debt, which has been at a record high.

As of now, the government of Denmark is struggling to come up with ways to reduce the number of interest-only loans issued by lending institutions. The new set of rules, guidelines, regulations, and limits is expected to be released and published later in the year.

Waiting for the rules

Henrik Sadd Larsen, the Business Minister of Denmark, has said that officials are trying to come up with a solution that lets the interest-only loan system stay without creating threats for the financial stability of the country.

Banks say that their efforts to push people to opt for amortizable loans have started to show positive results. Households have repaid approximately 2.5 billion kroner in the first part of the year itself. The same time last year, the net borrowing was estimated to be nearly 9 billion kroner.

The new approach

The Danish Mortgage Bankers’ federation Head Karsten Beltoft believes that the new regulations will allow the banks to decide on the limit of interest-only loans, which would be further subject to each household in question. He thinks that it would not work to have a standard limit of 60% across the industry.

FSA is most probably going to come up with guidelines for having a proportion of the total portfolio as interest-only loans. Beltoft also said that almost every second person opts for interest-only loans even today, and this way, the chances are to end up with approximately 50 percent.

The problem

The problem is that interest-only loans have become quite the norm with the Danes. With the interest rates as low as they are today, they do not see any incentive in moving to a amortized loan system. For them, it will directly translate into a major change in the monthly money they have at their disposal today.

IMAGE: “Christiansborg, Copenhagen” by Tim Bartel from Cologne, Germany – Christiansborg. Licensed under Creative Commons Attribution-Share Alike 2.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Christiansborg,_Copenhagen.jpg#mediaviewer/File:Christiansborg,_Copenhagen.jpg

Les Calvert is the owner and CEO of many internet property and travel related websites including this overseaspropertymall.comand he regularly writes news and articles for his websites, trade magazines and newspapers.

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