New Mortgage System Considered for Emerging Markets

The mortgage market in Mexico is rapidly growing, and the country is now to test a system currently used by lenders in Denmark. If the system is successful, which it has been in Denmark, then other emerging markets may choose to adopt it themselves.

Mortgages in Denmark are similar to those in America, with a combination of fixed interest rates with the option for borrowers to repay their mortgage early if they choose. This protects the borrower from the risk of changing interest rates, but also puts more risk onto the lender. Whereas the American system deals with this risk by a complex system of analysis of the market, demographics and credit factors, the Danish system works in a way perhaps more suited to emerging markets. Danish mortgages are financed through issuing bonds under the ‘balance principle’, whereby the bonds match the loans in terms of maturity and cashflows.

The market for Danish mortgage-backed securities is popular with investors, and is the second-biggest such market in Europe; measured as a share of GDP it is larger than America’s, but also more stable, hence its potential as a system to be used by emerging markets.

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