Nykredit applies the traditional Danish mortgage finance model, which dates back more than 200 years. The model is based on a principle of match funding, where the cash flows from borrowers' interest and principal payments match the interest and principal payments to the investors holding the bonds that fund the loans.
This means that:
The loan rate is fixed at the mortgage bank's funding rate in the bond market plus a margin
The borrower pays the principal, interest and a margin
The investor receives the matched cash flows of principal and interest payments
The mortgage bank receives the margin
The model offers a number of attractive features, not only to borrowers and bond investors, but also to the Danish economy:
A transparent market ensuring borrowers transparent prices and unique prepayment terms.
The 1:1 match between the loan and funding terms of a loan eliminates the risk of losses due to financial market developments.
Tap issuance and buybacks of covered bonds as a result of new lending and prepayments ensure high liquidity.
Danish mortgage banks are able to continue their lending activities, also during economic downturns. In Denmark, mortgage banks continued their lending activities throughout the entire financial crisis because new bonds could be sold in the market.