Regulation of mortgage loans funded by covered bonds

Danish mortgage banks are subject to tight legislation and are only allowed to grant mortgage loans that are funded by covered bonds. In addition, Danish covered bonds are subject to the EU covered bond framework.

In Denmark, mortgage lending and covered bond issuance are governed by the Danish Mortgage-Credit Loans and Mortgage-Credit Bonds etc. Act and the Danish Financial Business Act as well as a number of executive orders on eg ALM and property valuation.

These set out the frameworks governing the lending and funding of Danish mortgage banks. 

The main purpose of the legislation is to ensure a high degree of security for Danish covered bond investors.

Mortgage loans

  • Loan-to-value limits, property valuation, loan tenures and amortisation profiles are governed by legislation.
  • Legislation limits interest-only periods to 10 years for mortgage loans with LTVs >75%.
  • Loans to public housing carry a public sector guarantee and are subject to strict regulation.
  • The Danish FSA monitors compliance and may demand that loans originated in breach of legislation be removed from the cover pool and be funded with the bank's equity.

The legal and structural frameworks applying to Danish mortgage banks have in many ways been the pillars of the efficient and successful Danish mortgage system and are probably the most important reason for its long unblemished history, which dates back to 1850.

Danish legislation was most recently amended in the summer of 2017 to secure, for instance, the continued covered bond status of Danish mortgage bonds under the stricter CRD criteria.

Maximum legal loan terms

Property Type Legal maximum LTV Maximum loan term
Owner-occupied dwellings 80% 30 years
Agricultural properties 70% 30 years
Subsidised housing          80% 40 years
Private rental housing 80% 30 years
Office and retail 60% 30 years
Trade and industry 60% 30 years
Cultural-purpose properties 80% 30 years
Holiday dwellings 75% 30 years
Undeveloped land 40% 30 years

1 Nykredit's credit policy can be more restrictive