Tyler And I have been promoting the Danish mortgage system for years. Remember that in the Danish system, each mortgage is guaranteed by a corresponding deposit. As a result, mortgage holders have two ways to pay off their mortgage: 1) hold the mortgage and pay the monthly payments or 2) purchase the corresponding bond and, in effect, extinguish the mortgage. The latter option is attractive because when interest rates rise, the price of mortgages falls. As I wrote earlier:
So if a Danish borrower takes out a $500,000 mortgage at 3% interest and then rates rise to 6%, the value of that mortgage drops to $358,000 and the borrower could go to the market, buy his own mortgage, hand it over to the bank and, in this way, extinguish the loan. Since home values also decline as interest rates rise, this is also good insurance. Outstanding!
James Rodriguez writing on Business Insider points this out another advantage of the Danish systemthis avoids locking:
When mortgage rates skyrocket, as they have over the past couple of years, many potential sellers decide they don’t want to move after all. Sure, a new house might be nice, but trading it in would mean parting with a cheap mortgage rate. What could have been a welcome change suddenly feels like a painful and expensive divorce. So they stay seated. A crowded real estate market isn’t good for anyone: first-time buyers can’t find enough homes for sale, and aspiring sellers get stuck in places that are too big or too small. This is called the locking effect – and it could last for decades.
… An estimation (here, AT) suggests that the lockdown effect prevented over a million people from selling their homes in the space of just a year and a half, a high toll considering that around 5 million homes change hands in a typical year. I used to think of these golden handcuffs as an inevitable side effect of the magical 30-year fixed mortgage. But it doesn’t have to be that way. The answer to our problems may lie thousands of miles away… in Denmark.
…Danish sellers can win profit when they trade their low mortgage rates for more expensive ones, making it easier to move even when rates rise.
