51–58 of 58 posts
In the Danish system, each mortgage is backed by a matching bond. Thus, mortgage holders have two ways to pay off their mortgage: 1) pay the monthly payments or 2) buy the matching bond and, in effect, extinguish the mortgage. The latter option is valuable because when interest rates rise, the price of mortgages fall.
https://marginalrevolution.com/marginalrevolution/2024/06/mo...
Earlier quoted context omitted.
Both are forcing the bank to take action, but I think that switching like for like is less of an imposition than a forcing the bank to sell. 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 fact that someone who needs to sell will pay back the principal is valuable to the bank. If a bank starts offering the option to get out of the loan at a lower price, it would impair the value of that loan. The only way to make this happen would be to include it in the original terms of the loan (where this feature would be worked into the market math that sets the interest rate) or if the government changes the…
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.
Earlier quoted context omitted.
Yes - I don’t disagree. But provided those conditions are met I’m sure a blended rate could be arrived at that is much lower than market rate. 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.
This blending rate would just be subsidizing the have's at the expense of the have nots. It would be a market advantage to existing low rate holders going into the next 2 decades.
Blending is obviously politically uncomfortable. However, the “have’s” are already at a massive advantage.
Earlier quoted context omitted.
How would the current value be determined? The lender has no incentive to offer you a competitive price, when your alternative is to pay the loan in full. 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.
There is a straightforward way to value a mortgage loan because they are bought and sold every day. 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.
Earlier quoted context omitted.
There is a straightforward way to value a mortgage loan because they are bought and sold every day. 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'll admit that I'm in well over my head here. I'm no banker, and I've never had a realkredit loan myself. But here goes. 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…
In the Danish system, each mortgage is backed by a matching bond. Thus, mortgage holders have two ways to pay off their mortgage: 1) pay the monthly payments or 2) buy the matching bond and, in effect, extinguish the mortgage. The latter option is valuable because when interest rates rise, the price of mortgages fall.
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??
In the Danish system, each mortgage is backed by a matching bond. Thus, mortgage holders have two ways to pay off their mortgage: 1) pay the monthly payments or 2) buy the matching bond and, in effect, extinguish the mortgage. The latter option is valuable because when interest rates rise, the price of mortgages fall.
> “buy the matching bond” 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.
Earlier quoted context omitted.
> “buy the matching bond” 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??
Well. First of. Maybe you didn't have the money at that particular time. In Denmark every single mortage has a matching bond. 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…
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.