Danish mortgages bring home the bacon

Policymakers could learn from Denmark’s mortgage system, which is “less fragile” than the UK’s, a study has shown.

Researchers have compared the Danish and British mortgage systems in a paper in the latest edition of National Institute Economic Review.

In the-seven page paper, Mirror, Mirror, Who is the Fairest of Them All? Reflections on the Design of and Risk Distribution in the Mortgage Systems of Denmark and the UK, the researchers claim the Danish mortgage system emerged from the recent financial crisis “relatively unscathed”.

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The paper said: “The Danish model proved less fragile than the UK model during the financial crisis.

“While the Danish system has performed well during the financial crisis, it is challenged on many fronts, not least by international regulatory and rating standards that are designed for a universal banking model and occasionally are counterproductive when it comes to the stability of the Danish model.”

One of the features of the Danish mortgage market was that, in that country, mortgage loans are not granted by deposit-taking banks but by specialised institutions that are similar to narrow banks.

In Denmark the loans provided are matched by the covered bonds that fund them.

Adviser view

Steve Jackson, a director at Jackson Potter mortgage brokers in Sunderland, said: “I cannot see any reason why the Danish system would be a bad thing for the UK. It is a question of how the market capitalises itself.

“As we have seen here, banks lend money for mortgages but are also busy with fingers in other pies, which has caused problems.

“If it works in Denmark I don’t see any reason why it shouldn’t work here.”