Denmark's Genius Housing Fix(businessinsider.com) |
Denmark's Genius Housing Fix(businessinsider.com) |
"Let home owners buy their mortgage from the bank for the net present value of the loan instead of the remaining principle".
https://marginalrevolution.com/marginalrevolution/2024/06/mo...
It is interesting that banks dont already offer this for a fee. Im not too knowledgeable on the topic, but wonder if it has do with how mortgages are bundled, and the cost/paperwork of unwinding that.
The point of the Danish system is that it's a market system through and through. No one needs to twist the arms of lenders to make them "allow" something.
Can you explain how that works under this system?
This lets the loan taker buy back their own bonds for less than what they were paid (the loaned amount) when the bonds were issued.
Especially because this would correctly price the change in time value of money changes - without such a system, people are incentivised to pay as slowly as possible when the interest rate on their loan is lower than the central bank rate.
The refinancing part is essentially if the interest rates go up I can ask to pay those higher interest and bit more per month and then my total mortgage debt goes down. In some cases you can save a lot of money by doing that. It depends.
Also monthly payment is misleading. You pay quarterly not monthly. So its calculated maybe 10.000DKK monthly but you will always pay 30.000DKK quartely.
Don´t know why its always described as monthly in Denmark when no one pays realkredit on a monthly basis. It could be because the mortgage you can get is based on a monthly salary. But I am just guessing. No idea.
Its a good system though. IMHO Denmark is very much a delusional capitalist country with socialist tax rates but this realkredit system is really superb.
I don’t get it. If you could afford to buy out the bond, then why would you need a mortgage in the first place??
I'll try to explain it as well as I can.
When you make a mortgage loan you can have either a fixed rate or variable rate. Depending on which you choose the exchange-rate differs. It hovers around 100. When you make a loan you would want that to be 100 or more. For example if the exchange-rate was 101 you would receive 101 kroners for every 100 kroner you loan. A dream scenario. But more realistically it is probably closer to 99.
Mortgages is a boring thing. But extremely interesting when it comes to your own loan. The key to take away here is the following:
When the mortgage rates are high the bonds are less valuable.
When the mortgage rates are low the bonds are more valuable.
Now let's take an example. I take 1.000.000 DKK loan for a house at an exchange-rate of 100.00DKK. Meaning I now owe the mortgage institute 1.000.000 DKK.
The mortgage security bond for my house is still 100.00 DKK at this time. Meaning if I want to payout my loan. I have to pay 100.00 DKK to pay off 100.00DK. But for if the rates are high then the exchange-rate might be 95. In which case I can then go down to the bank and say 'I want out of my loan'. The bank will then say 'Okay. You still owe the mortgage institution 1.000.000 and since the exchange-rate is 95 right now. You then have to pay 950.000 plus some fees'. The bank will then buy the underlying bond for me and handle the rest.
In general we have many options when it comes to mortgages. It all involves refinancing:
* If the rate falls you can do a down conversion. You replace your old loan with a new one with lower rate. You might have to pay more to payout the loan since the exchange-rate will certainly be higher.
* If the rate falls you can do an up conversion. Similar to the example before. But this time you replace the loan. You get a higher rate, but you might "pay off" a significant amount.
Hope that sort of clears it up.
The money is already owed to the these entities at that rate. Allow folks to keep the rate on that amount even if they move.
If the goal is to make it easier to move I think there are options. But I don’t see anyone rushing to exchange a 2.65% loan for 8%. I mean at that rate it makes more sense to rent your home than to sell it.
But I needed to go find out a better description for my luddite self
Heres how using a bond backed mortgage causes the mortgage to become cheaper during interest rate rises
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* How Interest Rates Affect Present Value *
The interest rate is a key factor in calculating present value. A lower interest rate means future money is almost as good as money today because you can’t earn much interest. A higher interest rate means future money is worth a lot less because you could earn more interest with today’s money.
* Example *
1. Initial Mortgage Calculation:
- You have a $500,000 mortgage.
- You are paying it back over 30 years with a fixed monthly payment of $2108.
- The interest rate is 3%.
2. Interest Rate Change:
- Suppose the interest rate goes up to 6%.
3. Impact on Present Value:
When interest rates increase, the present value of those fixed monthly payments decreases. This is because if you were to invest money today at a 6% interest rate, you’d earn more on that investment than at 3%. Therefore, future payments are worth less because you’re missing out on that higher interest.
Toward the end of the document, there is a discussion of how the Danish mortgage system has fared in the various financial crises of the past 50 years starting with the twin oil shocks of the 1970s. Evidently it has been much more stable than the US system during that era. If for no other reason, the US should look at this system seriously.
The mortgage becomes a bond that’s less valuable to the investor, so they would want a higher interest rate up front to make up for it.
https://www.bnz.co.nz/support/home-loans/managing-your-loan/...
Uh? This is just moving the tokens around. Those sellers are still going to live somewhere, so they're either going to buy again or enter the rental market. So the "pool of available homes" is not improved by this maneuver, like, at all. At best the buyer and seller for a given transaction end up just trading places and renting-vs-owning availability wobbles transiently by a minor amount.
There is another tried and true method for increasing the pool of available homes though. It's called building more homes.
Sounds like socialism with extra steps.
That shouldn't stop us from finding solutions to similar issues outside of the major cities like Copenhagen, even if the problem isn't as noticeable in the country-side or minor cities.
https://awealthofcommonsense.com/2023/09/the-u-s-housing-mar...
Also, isn't there now a massive concern about large scale loan defaults and bankruptcies the next time mortgage rates reset in Canada?
I had a 3-year fixed rate mortgage some 5 years ago, fixed at the rate of the time which was historically extremely low (below 2% pa), before the interest rates skyrocketed, and was really happy :D I had a couple of years on those rates... but then I went to re-negotiate and it was best to get just floating rates as the banks were all panicking and would only freeze rates for 3 years at outrageous levels... I think I got floating rates at around 3.5% or 4.0% (it has gone down since). I imagine it would be extremely dangerous for a bank to just have frozen my rates for 30 years anywhere near that historical low, so you would have to pay a huge margin for them to take that risk , no?
I might be wrong, but that’s what I gather while renting in one of the hot spots of extreme housing prices (Vancouver).
This "genius fix" does nothing to help that.
The solution is to Build. More. Housing.
For example, the Ontario Housing Task Force had 55 recommendations, and that's only for the issues of provincial responsibility.
But Canada also has population growth ~10X that of the US.
In all cases it depends on your situation. How many years are left on the loan. Have your disposable income changed such that you can pay off more in which do you want to change the loean from a 30 year loan to 10 year loean instead.
It takes some serious thinking.
But basically:
Say a bond was originally worth say $100 and generated $10 of income in time T (10%). If interest rates rise so that $100 will now generate $20 (20%), then the original bond is worth less to a buyer. If we ignore the time delta, that bond would only really be worth $50 ($50 to generate $10 is the same 20%), so it's half as valuable. (The time change would bring it somewhere in between, depending on how long has elapsed).
#1 is Set a goal of building 1.5 million new homes in ten years. #2 is ... set “growth in the full spectrum of housing supply” ... as the most important residential housing priorities... #3 is ... Allow “as of right” residential housing up to four units and up to four storeys on a single residential lot. ...
etc.
So a lot of these boil down to build more houses / let people build more houses.
Blending is obviously politically uncomfortable. However, the “have’s” are already at a massive advantage.
However, this upside should be priced into the Mortgage price on the secondary market as well.
there are other factors as well, like holders of mortgages may care about much more than their market value. They are balancing time returns, risks, and their portfolio of investments.
The value calculation might have to change, as noted by fshbbdssbbgdd, but it's possible, since the Danish system calculates a value on the bonds that represent the mortgage. To me it seems like less overhead to forego the step of issuing the bonds and just make the mortgage work like the bonds would.
I believe the difference is that mortgages are tied to the individual property, and thus individually priced, whereas building bonds are part of an emission series. That means there's a liquid market, where all you have to do to pay back the loan is buy your bond type, not the particular bond for your property.
And that makes it different from a mortgage that is a contract between a single lender and a single borrower. There, you are stuck doing business with whomever owns the contract, and they can use that against you when negotiating the price.