Standard & Poor's Ratings Services
|Primary Author||Casper R Andersen|
In 2003, Denmark's mortgage market introduced interest-only (IO) loans, which became increasingly popular up to the beginning of the financial crisis in 2007. Since then, their popularity has further increased, due in part to preferential tax treatment of interest costs, such that IO loans comprised 54% of Denmark's total mortgage volume in 2012. As increasing numbers of IO loan periods will expire, a much-discussed topic within the Danish covered bond market is the potential effects that this will have on the already stressed housing market. In Standard & Poor's Ratings Services' opinion, this challenge could destabilize the Danish mortgage market as borrowers face potential dramatic increases in their mortgage payments when their initial 10-year IO periods expire. This could in turn lead to a sharp increase in arrears and potential foreclosures.