Holiday home loans: lending limit, loan types and requirements

Imagine a holiday home with a purchase price of 2.000.000 kr. and a lender’s valuation of 1.800.000 kr. The mortgage credit part of the loan (realkredit) can then be no more than 1.350.000 kr., which leaves 650.000 kr. of the purchase price uncovered. Those are the figures you need to be able to read before you sign anything at all.

For an ordinary holiday home, the mortgage credit part may never exceed 75 per cent of the lender’s valuation. That is the 75 per cent lending limit for holiday homes, and it is calculated on the lender’s valuation, even when you and the seller have agreed on a higher price. So this is not a general 75 per cent loan on holiday homes where the rest simply falls into place by itself.

Two misunderstandings crop up again and again. First, the 75 per cent applies only to the mortgage credit part. The limit says nothing about how much you can borrow in total. Second, the limit does not mean the bank automatically covers the rest. There is no automatic financing of the 650.000 kr., and that is exactly the kind of thing that makes a budget crack if you read the loan calculation too quickly.

The reason the sums look like this is that the value used in the loan calculation is the lender’s lending value, not necessarily the price you and the seller have agreed on. The lending value can be lower than the agreed purchase price, which is why you always need to know both figures before you can judge your own room for manoeuvre.

The rest of this article gives you the figures and the method, so you can work out for yourself how much you can borrow for your holiday home.

Your own funding and the real down payment requirements

The minimum requirement is the first figure you need to know. When you buy a home, including a holiday home, you must as a rule pay at least 5 per cent of the purchase price yourself. For a holiday home costing 3.000.000 kr., that means 150.000 kr. has to come out of your own pocket before any other money even comes into play.

For a holiday home, the typical split looks like this: no more than 75 per cent mortgage credit, up to 20 per cent bank loan and at least 5 per cent as your own down payment. That split looks neat on paper, but it is not a promise. The bank is under no obligation to cover the 20 per cent, and if your finances or the property are not to the bank’s liking, you are left with the gap yourself.

That is why 5 per cent is rarely enough in practice. The bank can require a larger down payment, and the purchase and loan costs have to be paid on top. The more you put in yourself, the less you need to borrow through the bank loan, which is typically more expensive than the mortgage credit part.

When you work through the down payment for a holiday home costing 3.000.000 kr., the 150.000 kr. is only the start. On top of that comes the cost of registering the mortgage (tinglysning), which on a mortgage loan of 2.250.000 kr. (75 per cent) comes to around 30.000 kr. (1.825 kr. plus 1,25 per cent), plus other costs of 40.000-60.000 kr. The realistic total you need therefore lands somewhere between roughly 220.000 and 240.000 kr., and that is the figure you need in your budget, not the 5 per cent alone.

Loan types and how they affect your room for manoeuvre

The type of loan you choose is not just a question of what the payment costs in the first month. It shapes your room for manoeuvre throughout the term, and it determines how much slack there is in your finances when interest rates move. Here are the four types of loan you will typically come across:

• A fixed-rate mortgage loan keeps the same interest rate for the whole term, typically 30 years, and gives you full predictability, but often also a higher initial payment than a variable-rate loan.

• A variable-rate mortgage loan gets a new interest rate every year, every three years or every five years, depending on whether you choose F1, F3 or F5.

• A mortgage loan with an interest rate cap has a variable rate with an agreed maximum, so you pay a little more in interest to limit the risk.

• A bank loan as top-up financing sits on top of the mortgage credit part when that does not cover the whole purchase price.

It is above all the combination of a variable rate and an interest-only period that can tempt you with a low initial payment. Measured on the initial payment, a variable-rate loan with an interest-only period is the cheapest, but also the riskiest, because the payment can change at every interest rate adjustment. An interest-only period of up to 10 years can be granted on a mortgage loan for a holiday home. However, if you have a debt factor (gældsfaktor) above 4 and a loan-to-value ratio above 60 per cent, you can as a rule only get an interest-only period on a loan with a fixed rate for the full term.

So access to an interest-only period depends both on how large a share of the valuation you borrow and on your total debt. If you are above both limits, the cheap initial payment disappears, and the sums suddenly look different from what you had expected.

The balance between the mortgage loan and the bank loan is the other factor that shapes your room for manoeuvre. The bank loan typically covers up to 20 per cent of the purchase price, that is, the part between the mortgage loan and your own down payment. It usually has a variable rate and often a shorter term of 10-20 years. The shorter term means a higher monthly payment on precisely the part of the financing that is also the most expensive, and it is worth doing the sums before you decide how to split the loans.

Lending limits for year-round homes, holiday homes and building plots

The lending limit, meaning the largest share of the value you can borrow with mortgage credit, depends not on your finances but on the type of property you are buying. A year-round home, a holiday home, a commercially let holiday home and a building plot are not treated the same, so the same purchase price can give you very different room for manoeuvre.

• For an ordinary year-round home, the mortgage limit is 80 per cent of the home’s value, so a house costing 2.000.000 kr. can carry a mortgage loan of at most 1.600.000 kr.

• For a holiday home, you can finance at most 75 per cent with the mortgage loan and up to 20 per cent through the bank, which means you have to put in at least 5 per cent yourself.

• For commercially let holiday homes, a separate limit of 60 per cent applies.

• For a building plot, the mortgage loan can make up no more than 40 per cent of the value.

A building plot is the type of property that gives you the least room for manoeuvre with mortgage credit, and the difference from a holiday home is marked. It is worth bearing in mind if you are considering building rather than buying something already built.

The lending limits are laid down in the Danish Mortgage Credit Act (realkreditloven). As a rule, no exemption is granted to exceed them when you take out new loans. Neither the 80 per cent for a year-round home nor the 75 per cent for a holiday home is something you can negotiate your way out of if you would like to borrow a little more. They are fixed, and that is the framework you have to work within.

The year-round home is the most favourable of the four types, measured by how large a share of the value you can put into mortgage credit. But the 80 per cent is still a ceiling, not a guarantee. The rest of the purchase price has to be found elsewhere, and how much that comes to depends on which of the four categories you fall into.

Lending value, budget and what the lender looks at

When you are looking at the loan calculation, it is easy to fixate on one thing: what the monthly payment will be. But the lender looks at something else, and something more. The assessment is about whether your finances can carry the whole property over time, not just whether you can pay the first bill.

That is why your budget needs to cover more than the loan itself. Make sure you have a handle on:

• Interest on both the mortgage loan and the bank financing, so you see the total interest burden and not just one part of it.

• Contribution (bidrag), which comes on top of the interest and is usually left out when people do a quick calculation.

• The agreed repayments on both loans: the mortgage credit part and the bank loan on top of it.

• One-off costs when you take out the loans, including lender fees, price loss on the bonds and registration of the mortgage.

These are the items that decide whether the sums hold up in practice. Skip one of them, and your finances look better than they are.

The assessment itself rests on four things: your income, your expenses, your existing debt and the total financing you are planning. A down payment of 5 per cent does not in itself entitle you to a loan. You can bring the right amount of equity and still be turned down if your income, expenses or debt do not match what you want to spend.

So what does the lender look for? The debt factor, meaning your household’s total debt relative to its annual income before tax, counts for a lot. If it is above 4 and the loan-to-value ratio is above 60 per cent, the lender may not, as a rule, give you a variable-rate loan where the rate is fixed for less than 5 years, or an interest-only period without a fixed rate for the full term. This is not a technical detail but a requirement that is worked through before anyone says yes.

If you choose a variable rate or an interest-only period, the lender must as a rule judge that you could also be approved for a 30-year fixed-rate loan with repayments. The credit assessment must also take into account what the payment will be once any interest-only period ends and repayments start again.

This is where lending value and equity meet the rest of the picture. The lending value sets the ceiling on how much you can put into mortgage credit, and your equity determines how much of the rest you can cover yourself. But neither figure stands alone. Both must be supported by the income and the budget the lender looks at, and it is the overall assessment that decides how much you can borrow.

How much can you borrow for your holiday home?

If you put the figures from the previous sections together, three numbers remain that set the limits for the mortgage loan and your own share:

• The lender’s valuation, that is, the figure the loan is calculated from.

• The loan-to-value percentage for your type of home, which is 75 per cent for a holiday home and 80 per cent for a year-round home.

• The equity you can put in yourself.

These are the three figures that together set your ceiling. You cannot work around any of them, and none of them can replace the other two.

This is exactly why an accurate valuation matters so much. Remember the example from the beginning: a purchase price of 2.000.000 kr. against a valuation of 1.800.000 kr. The 200.000 kr. difference between the two figures is not just theory. It makes the mortgage credit part 150.000 kr. smaller (75 per cent of 200.000 kr.), because the mortgage credit part is calculated from the valuation and not from the purchase price, and you will have to find that money elsewhere. A valuation that comes in below the price you and the seller have agreed on has a direct effect on how much you can borrow.

The same goes for the type of loan and the interest-only period. Fixed or variable rate, a rate cap or not, and whether you can get an interest-only period of up to 10 years are all choices you can only make once the framework is known. They can only move within the range set by the valuation and the loan-to-value percentage. If your loan calculation is unrealistic from the start, you are working with terms that do not exist, and the loan offer will not hold up when it is put to the test.

If you want to know your real room for manoeuvre before you sign anything, the next step is to get a concrete loan offer. It is based on the lender’s own valuation of the holiday home and on your finances. Brikk can put you in touch with a lender, so you can work with figures that hold up.