Rising interest rates have exposed the problems with many home loans
mortgages malfunction. Home loans underpin tens of trillions of dollars of financial assets, not to mention some of life’s most important transactions. And though the rich world is mercifully free of the tearaway lending that caused the global financial crisis of 2007-09, mortgage markets remain riddled with problems. The sharp rise in interest rates over the past year and a half has exposed them.
The trouble is that the system has gummed up the housing market. Moving home means borrowing afresh at much higher rates. So homeowners who might usually up sticks are instead staying put. In an otherwise hot economy, sales of existing homes are almost as rare as they were during pandemic lockdowns in 2020. Buyers have been left competing for the much smaller stock of new homes, sales of which are nearly a third higher than a year ago.
Fortunately there is a proven middle ground between the distorted American system and a floating-rate free-for-all. In Denmark homebuyers can borrow at 30-year fixed rates, and mortgages are prepayable. About half of borrowers fix for three decades. Yet there is no problem of “locked in” homeowners because a seller can end a mortgage by buying it back at its market value, which falls when rates rise, thereby cashing out the value of their interest-rate fix.
Danmark Seneste Nyt, Danmark Overskrifter
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