What is a down payment when buying a home, and when does it have to be paid?

When you buy a house, the down payment (udbetaling) is the part of the price you pay in cash yourself from the start. It is not the full amount. By far the largest part you borrow from a bank or through realkredit (Danish mortgage credit). Your down payment shows the bank that you are putting your own money into the home.

The down payment acts as security for both you and the lender. The bank takes on less risk because you already have money in the project. Your loan is also smaller, and your monthly costs become easier to keep track of.

When you buy an owner-occupied home, you generally have to pay at least 5 % of the purchase price yourself as a down payment. The rest is financed with loans, often a mix of mortgage credit and possibly a bank loan. A higher down payment means borrowing a smaller share.

In practice, it is simple. When you sign the purchase agreement, you pay the down payment to the estate agent or into a deposit account. The money stays there until the conditions of the agreement have been met, for example once the deed has been registered.

The down payment does not cover all the costs of buying a home. You also need to allow for the land registration fee (tinglysningsafgift), insurance, moving costs and advice. The process can be broken down into small steps to make it easier to manage.

What does a 5 per cent down payment mean, and why does the rule exist?

The five per cent rule means that, as a starting point, you must pay at least 5 % of the purchase price yourself. The rule comes from the rules of Finanstilsynet (the Danish Financial Supervisory Authority) on good practice for home credit. It applies to owner-occupied homes such as detached houses, owner-occupied flats and terraced houses, and also to holiday homes. For cooperative housing (andelsboliger), the requirement is calculated differently. If the house costs 2.500.000 kr., your minimum down payment is 125.000 kr. The rest is normally covered by a mortgage loan of up to 80 % and then a bank loan or your own funds for about 15 %.

The aim is to make sure your finances can withstand small knocks. Prices can dip slightly, and costs can crop up just after the handover. A small buffer makes all the difference.

• The bank does not just look at the first five per cent. It assesses your whole financial situation, e.g. income, fixed expenses and debt.

• Five per cent is a minimum requirement, not a target for how much equity you should have.

• In some cases, the bank will accept a smaller down payment if you can document strong finances or provide extra security.

• Exceptions always depend on an individual credit assessment and are not granted automatically.

• Above all, the rule is there to protect you from financial difficulties shortly after the purchase.

How to calculate your down payment step by step

The down payment on a home often feels like a big calculation, but it becomes easier to manage when you take it in small chunks. Use the steps here to calculate the down payment and get on top of the extra costs.

1. First, find the cash price of the home. Don’t just go by the asking price, but by the price you and the seller actually agree on.

2. Work out the minimum down payment by multiplying the cash price by 0,05, i.e. 5 %. You are welcome to put down more to reduce your debt and get lower monthly payments.

3. Then draw up a separate budget for the costs of buying. These are typically 2 to 5 % of the price and cover registration of the deed, insurance and advice. They do not count towards the minimum down payment.

4. Look at the financing. Mortgage credit can cover up to 80 % of the price. The rest is covered by a bank loan or extra savings. Use a simple table to see how a bigger down payment reduces the need for a bank loan.

Example: A house costs 3.000.000 kr. The minimum down payment is 150.000 kr. The mortgage loan can be up to 2.400.000 kr. The remaining 450.000 kr. is covered by a bank loan or extra savings towards the down payment.

When do you pay the down payment, and how does the deposit work?

Once you have signed the purchase agreement, the down payment usually has to be paid straight away. The amount is paid into the estate agent’s client account or an agreed deposit account. The money stays there until all the conditions of the sale are in place.

The deposit agreement sets out exactly when the money may be released. This happens, for example, when the deed has been correctly registered and there are no problems with mortgages or other rights. Until then, nobody touches the money.

The purchase agreement often includes a bank reservation and a lawyer’s reservation (bankforbehold and advokatforbehold). These reservations let you withdraw before a fixed deadline. For a lawyer’s reservation, the deadline is typically 6 working days. If you withdraw in time, you get the whole down payment back at no extra cost.

If the deadline for the reservations runs out and the sale still falls through because of circumstances on your side as the buyer, all or part of the down payment may go to the seller as compensation. This happens, for example, if your financing is not approved. So read the purchase agreement carefully and be sure of the consequences before the deadlines expire.

After the reservations and approvals come the registration of the deed and the conveyancing of the sale. On the handover date, the balance of the purchase price is paid, and the home officially becomes yours.

A simple timeline looks like this:

• Signing the purchase agreement, depositing the down payment

• Reservation period, during which the sale can be cancelled (lawyer’s reservation typically 6 working days)

• Registration of the deed and conveyancing are completed

• Handover date: the balance of the purchase price is paid and the keys are handed over

What can count towards the down payment when you buy a home?

It is not just the cash in your account you should think about when you are gathering money for the down payment on your new home. Several types of funds count, as long as they meet the bank’s requirements.

The most obvious are your liquid savings. That is money ready and waiting in the bank, or assets that can be sold quickly, such as shares or investment funds.

Do you already have equity (friværdi) in a home? It can be used to buy a new home, but only if the value can be released through a sale or by remortgaging and providing extra security at the bank. The bank assesses what the home can realistically be sold for and how long it may take before the money can be counted.

Inheritances and gifts from family can also be used. If a gift is above the tax-free amount, gift tax must be paid on the rest, but the money can still be included. The bank will normally ask for documentation, such as a probate court certificate (skifteretsattest) or a deed of gift (gavebrev), before the amount is counted as equity.

Pensions are trickier. As a rule, a pension is not counted towards the down payment, especially when the funds are tied up until retirement. If you withdraw a pension early, you have to pay a tax, for example 60 % of the amount on an instalment pension (ratepension) and 20 % on an age savings account (aldersopsparing). Do the sums before you decide.

Are you thinking of borrowing the down payment from family or others? Disclose it openly in the credit assessment. Hidden debt causes problems and can stop your approval.

In short:

• Liquid assets: Savings in your account and investments that can quickly be turned into cash

• Home equity: Value tied up in another home, released through a sale, remortgaging or additional security

• Inheritance/gifts: Money from inheritances and gifts, with the right documentation

• Pension: As a rule not counted, and withdrawing it early comes with a high tax charge

• Borrowed funds: Only approved if everything is disclosed in the bank’s credit assessment

Transparency and documentation make all the difference. The better you have your paperwork in order, the easier it is to get your down payment approved.

Borrowing for the down payment is possible, but is it a wise move for you?

Saving up the down payment is often the biggest hurdle on the road to buying a home. It gives you a solid foundation and peace of mind about your finances. If your savings don’t quite stretch, you can in some cases borrow for the down payment, for example from family. As a rule, however, the bank or mortgage credit institution lending you the money for the home may not also lend you the down payment, and a loan for it counts when the bank works out your debt factor and your disposable income. It may seem easy, but your debt goes up, and your fixed costs rise with it.

If you borrow for the down payment, the bank will look extra closely at your finances. It will want to see a stable income, a low debt factor and a healthy disposable income after all your fixed costs. The interest rate is typically higher than on a mortgage loan, so build some extra headroom into your budget. A simple stress test is to add 2 percentage points to the interest rate you expect.

Consider other routes first. Save for a little longer, ask for help in the form of gifts or inheritance, put your name down on housing association waiting lists, or look at smaller homes and cheaper areas. These choices make the financing more manageable and keep unnecessary debt down.

If you want to run the numbers on your own loan, talk to your bank or mortgage credit institution before you make an offer on a home. Brikk can also put you in touch with a lender through our home loan service.