While long-term fixed rate loans generally have a fixed interest rate throughout the loans’ maturity, adjustable-rate mortgage (ARM) loans have a fixed rate for 1, 3 or 5 years. These loans require refinancing every 1, 3 or 5 years. The new interest rate, which may be higher or lower than the previous interest rate, is fully transferred to the borrower. The system reduces the financial risks carried by the mortgage banks to a minimum. The only exception is if the borrower defaults on his payments.
This is the credit risk. The risk is not meant to be a burden on the bond holder. To prevent such an eventuality, the mortgage banks have a statutory obligation to hold sufficient reserves to be able to handle such situations. No bond holder has suffered financial losses in the more than 200 years of Danish mortgage credit.
Balance provides transparency
The match funding provides transparency. It allows borrowers to survey the size of their repayments, interest rate and fees and it provides bond holders with the secure knowledge that the mortgage banks and the issued bonds carry a very limited risk. The low risk on investments induces investors to reduce their demands on investment returns. In this way, the Danish mortgage credit system is designed to the advantage of the borrowers as well as the investors.