The International Monetary Fund is urging Denmark to phase out interest-only mortgages or risk destabilizing its housing market, as lawmakers and lenders debate whether to aid borrowers unable to pay their loans.
“In many countries, this type of loan is forbidden, so it wouldn’t be given in the first place,” Yingbin Xiao, senior economist at the Washington-based IMF, said in a telephone interview. “Given that this is an option in Denmark, we think it would be prudent for them to phase them out gradually because of the risk. The Danish market already has experienced a correction.”
The IMF is now adding its voice to a growing body of critics, including the central bank and Standard & Poor’s, arguing the interest-only loans have weakened Denmark’s $500 billion mortgage market. Though the model helped keep mortgages affordable during recessions, failure to amortize has underpinned growth in private debt to a world-beating 322 percent of disposable incomes, S&P estimates.
Danish mortgage banks started offering borrowers a decade- long deferment option on principal payments in 2003. The interest-only loans now make up 56 percent of outstanding mortgage debt, the industry estimates. More than 100,000 homeowners may need help, according to a February study by the University of Southern Denmark.
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