What is a mortgage loan?

When you take out a mortgage loan (realkreditlån), you as the borrower provide security in real property, for example your home. The security is given through a mortgage deed (pantebrev), which gives the mortgage credit institution the right to have the property sold at a forced auction if you do not pay. It is the most common way to finance a home purchase in Denmark, and for most homeowners it is also the cheapest form of borrowing.

The loan is not provided by the bank alone, but by special mortgage credit institutions such as Totalkredit, Realkredit Danmark and Nordea Kredit. They are subject to the Danish Mortgage Credit Act (realkreditloven), which requires a balance between the loans the institution grants and the bonds it issues. This is known as the balance principle.

The bonds are the reason why the interest rate on a mortgage loan is typically lower than on an ordinary bank loan. Investors buy the bonds because they are very safe: the loans are secured on real property, and the institution must keep its lending and its bonds in balance. That security means investors settle for a low interest rate, which benefits you as the borrower.

Mortgage loans are mainly used to finance homes and can run for up to 30 years. However, you can also take out a loan for other purposes if you put up real property as security.

How a mortgage loan works

There are three parties involved when you take out a mortgage loan. The first is you, the borrower. The second is the mortgage credit institution, which provides the loan, issues the bonds and handles the practical side of paying it out. The third is the investors who buy the bonds that fund the loan.

When you take out the loan, the institution issues bonds corresponding to the loan amount and sells them on the market. The money from the sale goes to you as the borrower. You do not get the money from the institution’s own coffers, but from the investors who have bought the bonds. In other words, it is the investors who finance your home purchase.

From then on, your payment consists of interest, repayments and a contribution fee (bidrag). The institution collects the amount and passes the interest and repayments on to the investors, who get their return that way. The institution itself does not earn money on the interest, but on the contribution fee and other charges. That covers its administration and risk.

The security in the property ties it all together. Because you mortgage your home, the investors take less risk, which helps give the loan a lower interest rate, but the security also has a downside. If you default on the loan, the property can be subject to a forced sale to cover the debt.

Four common loan types: an overview

There are several kinds of mortgage loan, including adjustable-rate loans where the rate is fixed for longer, such as F5 and F10, and not every lender issues new F1 loans. Here we look at four common loan types: the fixed-rate loan, F-kort, F1 and F3. They differ above all in how often the interest rate is set and how much uncertainty you take on as a borrower.

F1 and F3 are adjustable-rate loans. The interest rate is reset at regular intervals, and the new rate follows the market rate at the time of the adjustment. That is why they often start lower than a fixed-rate loan, but in return your payment can change along the way if interest rates move. The shorter the adjustment interval, the faster a change in interest rates feeds through to your payment.

An interest-only period (afdragsfrihed) is not a loan type in its own right, but a feature you can add to both fixed-rate and variable-rate loans. If you choose an interest-only period, for a while you pay only interest and contribution, and nothing off the debt itself. That can free up money in your budget here and now, but the debt does not fall during that period, so it is important to work out what it means for you overall.

Fixed-rate loan: security and predictability

A fixed-rate loan is the type of loan where the interest rate is set when you take out the loan and then stays fixed for the whole term, which can run for up to 30 years. This means your payment stays the same month after month. The only things that can change are the contribution and any changes in tax. The interest rate itself does not move.

The advantage is budget certainty. You know exactly what you will pay each month, whatever happens to market rates. If interest rates rise sharply in five years’ time, you will not feel it in your payment. That gives you financial peace of mind that the variable loan types cannot match, and for many homeowners that predictability is the very reason for choosing this type of loan.

The price of that security lies in the starting rate, which is typically higher than on variable-rate loans. If interest rates then fall, you do not automatically benefit either. You are stuck with your original rate unless you actively choose to refinance the loan. That involves fees, and the sums have to add up for you.

If, on the other hand, interest rates rise, the price of the bonds behind the loan falls. You can take advantage of this by paying off the loan for less than the original debt, in other words a price gain when you refinance. In practice you only have that option with a fixed-rate loan, and you should consider it if you expect interest rates may rise during the term of the loan.

Variable-rate loans: F-kort, F1 and F3

Here we look at three variable-rate loans, and the difference lies in how often the interest rate is set. The shorter the interval, the faster a change in the market rate shows up in your payment.

• F-kort has an interest rate that is adjusted every six months based on a short-term market rate, typically CITA or CIBOR. The rate can therefore change often, but it generally follows market developments closely.

• F1 is an adjustable-rate loan where the interest rate is set for 1 year at a time. You know your rate for that period, but after that it can change significantly.

• F3 sets the interest rate for 3 years at a time on the same principle. You know the rate during the period, but it can change significantly afterwards.

A variable-rate loan typically starts lower than a fixed-rate loan, because you carry the interest rate risk yourself instead of paying to pass it on to the investors. The price only shows later: if the market rate rises, your payment rises at the next rate adjustment. You do not have the same certainty about what you will pay in five years’ time as you have with a fixed-rate loan.

You can, however, limit the uncertainty. Some variable-rate loans have a built-in interest rate cap (renteloft), which sets an upper limit on how high the rate can go during an agreed period. That protection is not free. Without a cap, there is no upper limit to how high your rate can go if market rates rise sharply.

Interest-only periods: what they mean for your loan

An interest-only period means that, typically for up to 10 years, you make no repayments on the principal. You pay only interest and contribution, so the loan amount stays the same for as long as the arrangement runs. The debt does not get any smaller in those years, but in return your monthly payment is lower.

When the interest-only period ends, the whole loan must be repaid over the remaining term. That can mean a markedly higher payment, because the repayments have to be made over a shorter period than if you had been paying the loan down all along. If, for example, you have had 10 interest-only years on a 30-year loan, the whole debt must be paid off over the last 20 years. Do the sums before you choose the arrangement, so you know what you are letting yourself in for when the interest-only years are used up.

An interest-only period can suit you well if you are a first-time buyer on a tight budget and need some breathing room in your finances here and now. It can also make sense for investors who want to maximise liquidity and use the money elsewhere instead of tying it up in the property, but be aware that the arrangement increases your total interest costs over the life of the loan, because you pay interest on a debt that does not fall along the way.

Whether you can get an interest-only period at all depends on the loan type and your loan-to-value ratio. The lender assesses whether there is enough equity in the property to support the arrangement, and an interest-only period cannot always be combined with every product. So it comes down to an individual assessment of your situation, not an option you can count on in advance.

Contribution rate and other costs

Interest is not the only cost of your mortgage loan. On top of it you pay a contribution (bidrag), which is an annual percentage of the loan’s outstanding debt. It goes to the mortgage lender and covers its administration, risk of loss and earnings. The contribution rate comes on top of the interest rate and is paid along with your loan payment, so it is part of the amount debited each month.

How high your contribution rate will be depends on two things. It varies with the loan type – whether you have a fixed-rate, a variable-rate or an interest-only loan – and it depends on your loan-to-value ratio. The higher the share of the property you borrow against, the higher the contribution. That is because the lender’s risk grows when there is less equity to cover it if something goes wrong. Two homeowners with the same loan amount can therefore end up with very different contribution rates.

On top of the contribution, you should expect a number of set-up costs when you take out the loan:

• You pay a loan processing fee (set-up fee) to the mortgage lender.

• You pay a land registration fee (tinglysningsafgift) on the mortgage deed.

• There may also be a price loss when the bonds are issued.

Together, these costs can add up to a considerable sum. The land registration fee on the mortgage deed alone is 1.825 kr. plus 1,25 % of the loan amount (the 2026 rates), i.e. 14.325 kr. on a loan of 1 million kr. The costs typically fall due all at once when the loan starts, instead of being spread over the term.

Because both contribution rates and fees vary considerably from lender to lender and between the different loan types, you should compare loans on their annual percentage rate (APR, or ÅOP in Danish). That figure captures the interest, the contribution and the other costs, and it gives you a truer picture of what the loan really costs than the starting rate alone.

Worked example: your monthly payment

You can work out your monthly payment yourself if you know the four figures that go into the calculation and follow the steps below.

1. Find the four figures you need: loan amount, interest rate, term and contribution rate.

2. Work out the payment on the loan itself. You can do this with an online loan calculator or by hand using the annuity formula.

3. Add the contribution rate. In the example below, the contribution is 0,5% of the outstanding debt a year, equivalent to approx. 417 kr. a month at the start.

4. Add the two amounts together to get your total monthly payment.

The interest rate in the example is for illustration only and does not reflect current market rates. If you want precise figures for your own situation, get up-to-date offers from the mortgage lenders, as the interest rate follows the market at the time you take out the loan, and the contribution rate depends on the loan type and loan-to-value ratio.

If you choose a variable-rate loan, you calculate the payment using the current interest rate at the time you take out the loan. Remember that the payment can change at the next rate adjustment, so it is wise to budget with a buffer. When you choose a variable-rate loan, you should not count on all of your disposable income when working out what you can pay each month.

Mortgage loans for first-time buyers

As a first-time buyer, you face different considerations from the experienced homeowner. You typically have not had a loan before, and your finances may look different from how they will in ten years’ time. Choosing a mortgage loan is therefore not just a matter of numbers for you.

• You often have smaller savings and a lower appetite for risk than the experienced buyer. A fixed-rate loan can give you security, while a variable-rate loan can give you a lower starting payment. However, it does not make the loan any easier to get: as a rule, the lender may only offer a variable rate or an interest-only period if your finances could also be approved for a 30-year fixed-rate loan with repayments.

• Consider what your finances will look like over the next 5-10 years. If you expect your income to rise, or you plan to move, a variable-rate loan can be an advantage. If you plan to stay put, a fixed rate gives you peace of mind.

• Look into the option of an interest-only period if your finances are tight at the start. Be aware that the debt does not fall during the period and that the payment rises when the interest-only period ends.

• Get offers from at least two or three mortgage lenders and compare the APR (ÅOP), contribution rate and loan terms. Also talk to your bank about any special products for first-time buyers.

Which mortgage loan should I choose?

There is no single loan that is right for everyone. The four types in this guide each suit different needs. A fixed-rate loan gives you security with an interest rate that stays fixed for the whole term, while F-kort, F1 and F3 give you a lower starting payment in return for the rate being able to change along the way. So it is not about finding the best loan, but about finding the loan that suits your finances and your appetite for risk.

• A fixed-rate loan suits you if you want a fixed payment and do not like unexpected increases.

• F-kort suits you if you can cope with frequent rate changes and want the lowest starting payment.

• F1 suits you if you want a known interest rate one year at a time and can live with it changing at every adjustment.

• F3 suits you if you want a little more peace of mind than F1 but still a lower starting payment than the fixed-rate loan.

When you compare loans, do not look only at the interest rate. The contribution rate and fees can make up a significant part of your total costs over the term of the loan, and they vary from lender to lender and between loan types. That is why it is the annual percentage rate (APR, or ÅOP in Danish) you should set side by side, not the starting rate alone.

You can use the worked example above as a template, but put in your own figures and get up-to-date offers, as both interest rates and contributions change all the time. If you want a personal assessment of which loan best suits your particular situation, it is a good idea to talk to your mortgage lender or an independent adviser.

The next step is a practical one: get offers from several mortgage lenders and set them side by side, so you can see the difference in interest, contribution and terms with your own figures. Only then does it become clear which loan is really the cheapest and most suitable for you.