Tyler and I have been promoting the Danish mortgage program for years. Remember that in the Danish system each mortgage is backed by the same bond. As a result, mortgage holders have two ways to repay the loan: 1) hold the loan and pay the monthly payments or 2) buy the same bond and, in effect, cancel the mortgage. The last option is important because when interest rates go up, the price of mortgages goes down. As I have written before:
So, if a Danish borrower takes out a 500k mortgage at 3% interest and rates go up to 6%, the value of that loan drops to $358k and the borrower can go to the market, buy his own money, take it to the bank, and , in this way, to cancel the loan. Since house prices also fall as interest rates rise this is also pure insurance. Remarkable!
James Rodriguez writing at Business Insider points to another advantage of the Danish system, avoiding lock-in:
When mortgage rates rise, as they did two years ago, many potential sellers decide they don’t want to move. Sure, a new home would be nice, but a trade-in would mean parting with a cheap mortgage. What might have been a welcome change suddenly feels like a painful, expensive divorce. So they sit tight. The sweet home market is not good for anyone: First-time buyers can’t find enough homes for sale, and wannabe sellers are often trapped in lots that are too big or too small. This is called the lock-in effect – and it can last for decades.
… One estimate (here, AT) suggests the effect of the lockout prevented more than one million people from selling their homes in a year and a half, which is a staggering number considering the roughly 5 million homes that change hands in a typical year. I used to think of these golden handcuffs as the inevitable result of a magical 30-year fixed-term loan. But it doesn’t have to be this way. The answer to our problems may be thousands of miles away … in Denmark.
…Danish retailers are able to achieve a profit when they trade in their most expensive mortgage rates, making it easier to move even when rates rise.
Source link