In my discussion with my friend living in denmark, I learnt she is paying Mortgage of 1% over 30 years and there is no repayment penalty. Im completely surprised and with some envy I started doing some googling. I found out that Denmark’s $490 billion mortgage-bond market, is the third- largest after the U.S. and Germany, proved resilient during the global financial crisis.  This really made it even difficult to understand, how they made this possible.

In Danish Mortgage Model, there are no banks, only mortgage companies (MCI).  A mortgage company  is not a commercial bank or lending institution, doesnt keep the mortgage on its books, and doesnt take any profit. It acts as intermediary between the persons asking for mortgage and investors funding the loans.

All MCIs follow strict balance principle, where the loan to household is exactly matched by the bond bought by the investor. MCI does not take any interest rate risk or vol risk or FX risk or liquidity risk.

If the borrower wants to refinance, then the MCI will put the mortgage in auction and whatever rate the bonds are sold for, that will be the mortgage rate for the borrower.

Equity Protection against housing price declines. housing prices often drop when interest rates increase. A rise in interest rates also means a drop in bond prices. As mortgage debt is linked to bond prices, it will decrease when housing prices decline

On the outset, this looks so simple and neat. Im very much impressed with the results of this model and Im sure everyone would be. I think honesty and removing the commercial element from the mortgages has made this possible.