The primary purpose of the initiative is to increase the resilience of home-owners – and the Danish economy – to falling house prices, increasing interest rates and other negative economic shocks that may impact the individual home-owner or Danish economy more generally.
The low nominal interest rates in Denmark and Europe allow Danish home-owners to take on very high levels of debt relative to their income. The continued widespread use of interest-only loans exacerbates this trend. When both short-term and long-term interest rates are low, the mortgage debt amortisation is, in practice, what determines how much potential home buyers can pay for a home. An amortisation requirement for the highly indebted home-buyers will cap the level of debt that they can take on.