Second — Variable Interest. I mentioned above, historically speaking, 2% is very, very low interest. But, if you’re talking about a few millions, even 2% is a lot. It’s 20.000 DKK per million, per year.

For those who can’t stomach that, there are variable-interest loans — fixed for 5 years, for 3 years, for 1 year, or variable per month. The interest on these loans — for all of them — is near or effectively zero. Thing is, each of these loans have a “reissuing” period, and, when that period is past, the interest rates update to what’s then the new market prices.

In 2018, for example, the F5 — fixed for five years — interest rate had around 0,15% (plus or minus 0,05% — it’s even less in 2020). This means that you paid 1.500 DKK per million borrowed, per year. It’s absolutely crazy. It’s even lower in 2020.

Thing is, if you get this loan in 2020, you would pay the same interest for 2021, 2022, 2023 and 2024. But when 2025 comes, your interest rate will update. While it’s been staying low since 2010, the interest rate can climb back up, and you could end up with a rate of 1,5%, or 2% or even more.

Third — Mix of the Fixed and Variable Interest. You don’t need to get just fixed or just variable — you can also get a combination of both. For example, if you borrow 3m for the realkredit loan, you can borrow 2m with interest rate fixed for 5 years, and 1m with a fixed rate for 30 years.

Is it worth it? In the above case, for example, you would get an effective interest of 0,76% — a 0,61% higher rate than the F5 (18.270 DKK per year per million), but, at the same time, you would insure your tail risk — if rates go up to the sky, the effect would be a bit cushioned by the loan mix.

Interest Rates in Denmark, in the past twenty years. Source.

Interest-only Loans. When you loan money, you’re required, over the loan period, to a) pay an interest on the loaned amount, and b) to repay the loan itself, this in installments. If you loan money for thirty years, each year you would need to pay 1/30th of the loan value back to the creditor, plus interest.

In Denmark, we’ve loans that let you skip b) for the first ten years — effectively making your loans only interest. You don’t need to worry about installments on the principle for a full decade.

Only Interest? This is the big deal 👌🏻

While interest rates are very low, property prices are high — and, if you loan, for example, 3m DKK for thirty years, besides the interest, you would be supposed to pay back 100.000 DKK every year. Cashflow-wise, this can be a killer for most people. It’s a lot of money.

In this case, you would be building equity — it’s not that you’re “throwing away” your money. But, if it comes it, you would be tying a very high fraction of your net worth into just one asset. That’s risky.

If you, on the other hand, pay only interest, you’ve optionality. In life, especially when looking into the future — with all its uncertainty — the plan or setup that gives you the most options is often the best. If you get an interest-only loan, you can, if you want, still pay back installments on the loan itself. But you’re not obliged to do it.

If you get an interest-only loan, buying a place can be cheaper than renting out in the vast majority of cases. Also, you would’ve more money in your pocket every month. Cashflow. That’s what you want.

Had it not been for this rule, I would’ve not bought my apartment. This is what makes the deal good.

Cons? Catches? Two:

i) You (obviously) need to still pay back the principal, eventually. In the 3m loan case, after ten years, you will need to start paying 150.000 (not 100.000) DKK every year. If you’re staying at the same place, and with the same loan, the party is over. You could, though, renegotiate your loan — what deal you’ll get (good, bad, etc.) will depend on how interest rates look like right then and there.

ii) “No repayment” loans have slightly higher bidraggsats — more on this, below.

Note — Some banks are experimenting with loans with no repayments for 30 years. So technically, you’ll only pay interest, for the whole, full period. Many caveats apply. But it’s happening!

The Bidraggsats. If you were looking for the “zero interest” catch — here it is: the bidragssats. The bidragssats are fees, set by the banks, to make money off you even in you pay zero (or negative!) interest rate. For a fixed 30-year loan without repayments, this fee is 1% per year.

These fees are absolute bul****t. The banks have carteled and — as they can’t make money off us with high interest rates, they just raise these fees in concert. It’s ridiculous.

This means that even if the interest rate on your loan is 0,15%, your effective rate — what you’ll need to pay every year as “interest” — is around 1%. There’s no way around this. (Or, if you know a way around this, please let me know!)

How much bidragssats you’ll need to pay depends on four factors:

a) from which bank and credit institute you borrow — e.g. Jyske Bank are the cheapest, while Nykredit/Totalkredit are the most expensive.

b) how much of the value of the apartment you need to borrow — if you’ve capitalized (meaning, you’ve paid off) 50% of your apartment, the bidragssats is lower than if you only capitalized 20%. The more you’ve paid off your loan, the lower the bidragssats.

c) if you took repayments or no repayments — no repayments loans pay ~0,2% more per year.

d) what type of loan you get — the lower the interest, the higher the bidragssats, usually.

So don’t be fooled. Always ask the bank about the bidragssats. You really won’t pay 0%, 1% or 2% — ask banks for what is you real, actual rate.

Note — Banks have a measurement called ÅOP — this measurement includes: the interest rate, your bidraggsats, and the annualized percentage impact of your transaction costs.

Note II — Don’t use Nykredit! If people don’t use them, they’ll be obliged to lower these fees — and it will be an inspiration for other banks not to follow them. Bidragsatss have been climbing up for years, and there’s not enough customer backlash as it should.

Note III — Bidragsatss are negotiable. It might not be the case directly — after all, banks fix them for all their customers. But, as they’re set and based on how big is the realkredit loan as a percentage of the value of your property, if the property value goes up — as it did in the last five or so years — you can (and should) ask for the bidragssats to be adjusted.

If you bought your apartment for 3m, and now it’s worth 4m, your loan will be lower as a percentage of the value than it was when you first bought the property. Because of that, you can ask and should ask for your bidragssats to be recalculated.

You can see the different bidragssatser per credit institute here.

Bank Loans — The Expensive Loans

You can use these cheap loans — the realkredit loans — for only up to 80% of the value of the property. For the other 20%, you need to either self-finance, or ask for a bank loan — the “expensive loan”.

Regardless the case, you need to self-finance at least 5% of the purchase. Then, you can ask banks to loan you the difference between what you paid (minimum 5%) and 20%.

These loans are more expensive than the realkredit ones. In 2020, you could expect to pay 3 to 7% per year, if not more, depending on the bank and your risk profile.

Bank loans are usually for ten years max and you can’t get the “no repayment” deal. You need to pay back.

Contra-Catch. Still, bank loans not as bad as they’re made up to be. Unlike the realkredit loans, you can negotiate the interest rate. In this case, you can play banks against each other — if one offers you 3,5%, you can show another bank that offer, and ask them to match. Like this, slowly, you can get to interest rates that are around 3% — not the 5%, 6% or higher that banks will try to get you into first.

Also — These loans also don’t have bidragssats. This means that, if you’ve a fixed loan without repayments, you might pay — in effect — the same rate for the fixed loan and for the bank loan — ~3% on both cases.

Tax Deductions on Mortgages

In Denmark, you’re allowed to deduct 33% off the annual interest cost from your income taxes. This means that if your interest rate is 1,5% (including bidragssats), your effective — and now final interest rate will be 1%, as 1,5% * 66% = 1%.

You’ll still pay 1,5% to the bank. But you’ll get that 0,5% back as an effective post-taxes salary/income raise. If you’ve 3m in loan, this means that you would get 14.850 DKK back in taxes per year.

This is the difference between the “brutto” and “netto” monthly costs. Brutto are the costs before this deduction, and netto are the costs after the deduction. In the long run, this can sum up to a lot of money.

Note I — There have been talks about reducing this deduction from 33% to 25% — again, we’re at the mercy of the Danish laws here.

Note II — If you don’t pay taxes (for whatever reason), you won’t get this deduction, as it’s based on your income.

+ Important! It’s strongly — very strongly — suggested that you’ve your financing options approved by the bank before you start seriously looking for an apartment. It usually takes a few days minimum — but usually around a week, or more — to get your preferred loans pre-approved. If you’re in a bidding war or ready to make an offer, you want to have all this sorted out.

Also Note — Once you get an approval, the bank will issue a “Bank Guarantee”. This note specifies you’ve been pre-approved for a specific amount, and would normally be valid for a few months.

If You Enjoy This Guide So Far — You Will Enjoy A Ton of (Extra) Free Material 👇🏻

🔥 I’ve prepared two hours worth of in-depth videos, financial models and analyses, an exclusive Q&A with my lawyer and a lot more. You can get that for free plus unlimited access to this guide by following this link.