Can I afford it? Mortgage bond loans, down payment and debt-to-income ratio explained

You can typically buy for roughly 4 to 5 times your total annual income before tax, if your finances are otherwise sound. Three numbers decide how high you can go: your loan may cover at most 80 percent of the home’s price (mortgage credit), you have to put up at least 5 percent yourself as a down payment, and your total debt should stay below 4 times your gross income. Below we go through each number, so you can work out your own room to manoeuvre before you head into bidding.

The loan splits in two: mortgage credit up to 80 percent, the bank covers the rest

A home purchase in Denmark is almost always financed in two layers. A mortgage bond loan (realkreditlån) covers up to 80 percent of the price on a year-round home (75 percent on holiday homes). This is the cheap part, because it is secured by a charge on the home. The rest is typically covered by a more expensive bank loan (home loan), and you have to put up at least 5 percent yourself as a down payment (udbetaling).

A worked example on a home costing 3,000,000 kr:

Part	Share	Amount
Mortgage bond loan	up to 80 %	2,400,000 kr
Bank loan	typically up to 15 %	up to 450,000 kr
Down payment (your savings)	at least 5 %	at least 150,000 kr

The ratio between your loan and the home’s value is called the loan-to-value ratio (belåningsgrad). The lower the loan-to-value ratio, the more flexible your loan composition is, and it matters for which loans you are allowed to choose (see the section on fixed versus variable).

Debt-to-income ratio: your debt should be below 4 times income

The debt-to-income ratio is the central ceiling. The debt-to-income ratio (gældsfaktor) is your total debt divided by your annual gross income (the household’s total income before tax). A debt-to-income ratio above 4 is considered high.

The bank may lend you more, but then stricter demands are placed on your finances being able to hold up if home prices fall:

Debt-to-income ratio	Robustness requirement
below 4	normal assessment
4 to 5	must be able to withstand a 10 % price drop
above 5	must be able to withstand a 25 % price drop

Example: if you earn 700,000 kr a year between you, a debt-to-income ratio of 4 points to a total debt of around 2,800,000 kr. If you have other debt (car loans, student debt, consumer loans), it counts and pushes the ceiling down. Clear expensive debt out of the way before you apply for a home loan.

Interest-rate stress test: can you pay if rates rise?

The bank stresses your finances by calculating with a higher interest rate than you actually pay today. The interest-rate stress test adds 1 percentage point on top of the current fixed mortgage rate, with a floor of 4 percent, and calculates on a 30-year fixed loan with repayments. You have to be able to pay that instalment and still have a reasonable disposable income left.

Disposable income is what is left each month once housing, food, transport, insurance and other debt are paid. The banks work with guideline minimum amounts that rise with the size of the household. You can do a quick test yourself: take the stressed instalment, add running and living costs on top, and see whether it still works out in an ordinary month.

Fixed or variable rate, and are you free to choose?

You don’t always choose freely. The rules link your choice to the risk in your finances:

• If your loan-to-value ratio is above 60 percent and your debt-to-income ratio is above 4, you may only choose a fixed-rate loan, or a variable loan with repayments and at least 5 years’ rate fixing.
• If you are below those limits, you have free access to the whole range, including shorter rate fixings.

A fixed rate gives a predictable instalment for the whole term (up to 30 years) and is easy to stress-test against. A variable rate often starts lower, but the instalment can rise. A fixed loan is the safe starting point for most first-time buyers, precisely because you know exactly what you have to pay.

Interest-only periods lower the instalment now, but cost in the long run

An interest-only period (afdragsfrihed) means that for a period you pay only interest and the administration margin, not repayments. This lowers the monthly instalment markedly, but you are not reducing the debt in the meantime, and the total interest cost becomes higher. On a mortgage bond loan you may have an interest-only period of at most 10 years, and the maximum term is 30 years.

An interest-only period can give breathing room in a tight stretch, but use it deliberately. If you can only afford the home with an interest-only period, the home is probably too expensive for your finances.

Administration margin: the ongoing cost many forget

On top of the interest on the mortgage bond loan, you pay an administration margin (bidragssats) to the mortgage credit institution. On average it is around 0.80 percent a year of the outstanding debt. It typically rises with the loan-to-value ratio and with interest-only periods, and it counts fully towards your monthly housing cost. On a mortgage bond loan of 2,400,000 kr, 0.80 percent works out to roughly 19,200 kr a year in the margin alone.

When you compare loan offers, look at the total instalment (interest plus the margin plus any repayments), not just the nominal interest. It is the total monthly cost that decides whether you can afford it.

How to work out your room to manoeuvre

1. Add up the household’s gross income and multiply by roughly 4 to 5 for a rough ceiling on total debt.
2. Subtract existing debt, so you see what there is room for in home debt.
3. Check that your down payment is at least 5 percent of the target price.
4. Stress the instalment: calculate with the fixed rate plus 1 percentage point, floor 4 percent, over 30 years with repayments, plus the margin of roughly 0.80 percent.
5. Add running and living costs on top and see whether the disposable income holds.

A loan offer from the bank is the final answer, but with these numbers you can assess a listing yourself before you spend a weekend on viewings.