Understand your loan offer: interest rate, APR, administration margin and outstanding debt

1. How much money do you actually get for the home purchase?

2. What do you have to pay now and later?

3. How much do you owe along the way?

4. What can it cost to get out of the loan?

The interest rate is only one of the answers. Bond price (kurs), principal (hovedstol), administration margin (bidrag), fees, repayments (afdrag), outstanding debt (restgæld) and redemption terms can change the overall economics of the loan considerably.

So compare offers on the same loan amount, term and repayment profile. Otherwise the lowest interest rate or APR (ÅOP) can hide a completely different risk and debt trajectory.

In brief

• Principal and proceeds (provenu) are not necessarily the same thing.
• The simple loan overview shows five key figures, but it does not replace the full terms.^[1]
• The nominal interest rate, the borrowing rate (debitorrente) and the APR show different things.
• The mortgage administration margin is paid on top of the interest rate and can be changed during the term of the loan in line with the terms.
• Depending on the loan type, the bond price can affect the principal, the proceeds, the interest rate or the redemption amount.
• The monthly payment (ydelse) should be broken down into interest, administration margin or interest margin, repayments and fees.
• The monthly payment after tax is an estimate, not a guarantee of your actual tax deduction.
• Outstanding debt and the redemption amount are not always the same.
• Total repayment on a variable-rate loan is based on assumptions about future interest rates.
• The lowest APR is most comparable when the offers have the same amount, term and repayment profile.

Which documents come with a loan offer?

Home financing can consist of several documents and several loans.

Among other things, you may receive:

• Simple loan overview
• Loan offer
• European Standardised Information Sheet, ESIS
• Loan and mortgage agreement
• Calculation of monthly payment and outstanding debt
• Amortisation schedule
• Price list and fee overview
• General and special loan terms
• Information about price hedging
• Bank loan offer
• Guarantee documents

The documents serve different purposes.

Do not just read the front page. An important right for the lender to change terms, or a key redemption term, may be in the general conditions.

The simple loan overview

The simple loan overview is meant to make it easier to compare home financing.

For mortgage loans (realkreditlån) and home loans similar to mortgage loans, it shows five key figures:^[1]

1. The average monthly payment before tax for the first 12 months
2. The fee for setting up the loan
3. Administration margin to the mortgage credit institution (realkreditinstitut) or interest margin to the bank for the first 12 months
4. The total amount expected to be repaid over the term of the loan
5. The borrowing rate and the APR

It is a good place to start, but on its own it does not tell you:

• How the interest rate can change
• How the bond price affects the proceeds
• What the outstanding debt is after 5 or 10 years
• What happens after an interest-only period (afdragsfrihed)
• What it costs to redeem the loan
• Which prices the bank or the mortgage credit institution can change

Look at the whole financing package

The home purchase may be financed with several parts:

• Mortgage loan
• Bank loan
• Your own money
• Possibly a family loan or other financing

A cheap mortgage loan cannot therefore be assessed in isolation if the bank loan is expensive or has a short term.

Example of total financing

On top of this there may be transaction and loan costs, which are either paid in cash or increase the amount you need to finance.

So compare the total monthly payment and debt, not just one part of the loan.

Principal, loan amount and proceeds

The terms are often mixed up.

If the principal is 3.000.000 kr., it does not automatically mean that 3.000.000 kr. goes into the home purchase.

Read the detailed guide on the principal of a home loan.

Example: from principal to proceeds

Below is a simplified bond loan. The amounts are illustrations, not a loan offer.

The relationship is:

Principal × bond price less costs = approximate net proceeds

The exact calculation depends on the loan type, the settlement price, transaction costs and which expenses are financed.

The bond price works differently on different loan types

Bond loan

On a bond loan, bonds corresponding to the nominal debt are sold.

If the price is below 100, every 100 kr. of nominal debt gives less than 100 kr. in proceeds. More debt therefore typically has to be issued to raise a given cash amount.

Cash loan

On a cash loan, the calculation starts from the cash amount you need. The effect of the bond price is built into the cash loan interest rate rather than being shown in the same way as a higher cash principal.

It is therefore misleading to compare the two loans on principal or coupon rate alone.

Read the detailed guide on fixed or variable rate, bond price and outstanding debt.

Nominal interest rate and borrowing rate

Nominal interest rate

The nominal interest rate is the rate used as the starting point for the interest payment.

On a fixed-rate mortgage loan, the bond rate is fixed for the term of the loan. On a variable-rate loan, the rate changes according to the loan's method and intervals.

Borrowing rate

The borrowing rate takes into account how often interest is added to the loan. It can therefore be higher than the nominal interest rate.

The borrowing rate does not necessarily include all the loan's costs. The APR is broader in that respect.

Example

The figures are illustrative. The APR depends on, among other things, the bond price, administration margin, fees, amount and term.

Fixed and variable rate in the offer

With a fixed rate, look for:

• The bond rate
• The bond price
• Whether the loan is callable
• The option to redeem at a price of 100
• How sensitive the outstanding debt is to the bond price

With a variable rate, look for:

• The reference rate
• The interest margin
• How often the rate changes
• When the bonds are refinanced
• How the monthly payment is affected by a higher rate
• The redemption terms between rate adjustments

A low variable rate today says nothing about what the rate will be over the whole term of the loan.

What does APR mean?

APR (ÅOP, short for årlige omkostninger i procent) means the annual percentage rate of charge.

The APR combines interest and relevant costs, among other things, into a single annual figure for comparison. This can make it easier to compare two offers with the same structure.

The APR is most useful when the loans have the same

• Loan amount
• Term
• Repayment profile
• Type of interest rate
• Time of calculation
• Assumptions about payout and price hedging

Forbrug.dk generally points out that the APR is mainly used to compare loans with the same amount and term.^[2]

The APR does not tell the whole story

Two loans can differ in:

• Interest rate risk
• Bond price risk
• Outstanding debt
• Flexibility
• Redemption risk
• Repayment profile

The lowest APR is therefore not automatically the loan that best suits a particular household's finances.

The administration margin rate

On a mortgage loan, you normally pay an administration margin to the mortgage credit institution on top of the interest.

The administration margin can depend on:

• The loan-to-value ratio, LTV (belåningsgrad)
• The loan type
• Whether the loan has repayments
• Whether the loan has a fixed or variable rate
• The property type
• The institution's pricing structure

The administration margin is typically calculated on the outstanding debt and charged together with the monthly payment.^[3]

Can the administration margin change on a fixed-rate loan?

Yes. A fixed rate means that the bond rate is fixed. It does not mean that the administration margin rate (bidragssats) is locked for the whole term.

The mortgage credit institution can change the administration margin rate in line with the loan agreement and the applicable rules, with the required notice. Forbrug.dk states that the institution must notify the customer of an increase six months before the change.^[4]

So read the terms on:

• Changes to the administration margin
• Justification and notice
• Price of an interest-only period
• Administration margin in different loan-to-value bands

The bank's interest margin

A bank loan or priority loan (prioritetslån) does not normally carry a mortgage administration margin. Instead, the price may consist of:

• A base rate or reference rate
• An individual interest margin
• Set-up fees
• Ongoing fees
• Any commission

Ask:

• Which part of the interest rate can be changed?
• How often can the bank change it?
• Is the interest margin individual?
• What notice applies?
• Are other products or a customer relationship required?

Set-up costs

An offer can include several one-off costs.

Finans Danmark mentions, among other things, the loan processing fee, arrangement fee (stiftelsesprovision), brokerage fees (kurtage), price spread (kursskæring), other fees and land registration fee (tinglysningsafgift) as possible costs on mortgage loans.^[5]

One-off fees at the four large mortgage credit institutions

Three fees recur in every loan offer from the mortgage credit institution. The loan processing fee is the price for setting up the loan. The settlement commission (afregningsprovision) is a percentage of the bonds' value that the institution charges for selling them. The price deduction (kursfradrag) means that the loan is paid out at a slightly lower price than the bonds. 0,2 price points on a loan of 2.000.000 kr. is 4.000 kr.

On top of this comes the bank's own fee for handling the mortgage loan. In the price lists of 39 banks and savings banks, it is between 4.000 and 6.500 kr. for most of them. A few banks charge up to 12.000 kr., and some sell a combined home-buying package instead. If the mortgage credit institution's fees also appear in the bank's price list, they are the same fees. Count them only once. See administration margins and fees at the four institutions side by side in the guide Compare home loans.

The land registration fee goes to the state and is the same wherever you borrow: 1.825 kr. plus 1,25 per cent of the principal of the charge. The percentage is rounded up to the nearest whole 100 kr.^[10]

Some costs are paid in cash. Others are financed and increase the debt.

The monthly payment is made up of several parts

Your payment can consist of:

Interest + administration margin or interest margin + repayments + fees = payment before tax

Simplified example of the first month

Repayments are not a cost in the same way as interest and administration margin. Repayments reduce your debt, but the money still has to fit into the monthly budget.

Before and after tax

Interest expenses and certain administration margins can have tax implications. That is why offers often show a payment after tax.

The calculation is based on assumptions about:

• The tax value of your deductions
• The split between borrowers
• The size of the interest payments
• The applicable tax rules

Your actual finances may therefore differ.

For your disposable income (rådighedsbeløb), you should know:

1. The payment before tax
2. The expected tax effect
3. When the effect shows up in your preliminary income assessment (forskudsopgørelse) or annual tax statement (årsopgørelse)
4. Whether the interest rate or administration margin can change

Read the guide on disposable income when buying a home.

Repayments and interest-only periods

An interest-only period lowers the payment during the period, because the debt is not paid down in the same way.

At the same time, it can mean:

• Higher outstanding debt
• Higher administration margin
• A larger payment when the interest-only period ends
• Longer time with high debt
• Greater sensitivity to falling house prices

Simplified comparison

Compare the offers on the same repayment profile. Otherwise a lower payment may simply be because you are postponing the repayments.

Outstanding debt is not the redemption amount

The outstanding debt shows how much of the loan has not been repaid according to the loan's schedule.

The redemption amount shows what it costs to close the loan at a given time.

On bond-based loans, the redemption amount can also depend on:

• The market price
• The option to terminate at a price of 100
• The timing relative to the payment date (termin) or rate adjustment
• Brokerage fees and price premium
• Interest and fees

Total repayment

The simple loan overview shows how much you are expected to repay in total over the term of the loan.

The figure can include:

• Interest
• Administration margin or interest margin
• Repayments
• Relevant costs

It should be read with caution.

On a fixed-rate loan, the calculation is based on a known bond rate, but the administration margin and certain fees can change.

On a variable-rate loan, the calculation has to use assumptions about future interest rates. The actual repayment can therefore end up higher or lower.

A large total repayment is not the same as a large cost either, because the repayment includes the loan amount itself.

Illustrative comparison of two offers

The figures below are simplified and show the method, not current market terms.

Both offers must provide 3.000.000 kr. of financing and run for 30 years with repayments.

Offer B looks cheaper at the start. That does not tell you what your finances will look like if the variable rate rises later.

In the example, offer A has higher nominal debt because of the bond price. On the other hand, if interest rates rise later, the resulting fall in the bond price can reduce the redemption amount.

Stress test the variable rate

Ask to see the payment and disposable income at several interest rates.

Simplified example with outstanding debt of 3.000.000 kr. The table only shows the interest rate change before tax and without changes to the administration margin or repayments.

The actual change in the monthly payment depends on the loan's payment schedule, remaining term, repayments and product terms.

Redemption and flexibility

The price of the loan is also about how easy it is to change or close.

Check:

• Can the loan be terminated at a price of 100?
• When can that happen?
• What is the notice period?
• Otherwise, does the loan have to be redeemed at market price?
• Can the market price be above 100?
• What do extra repayments cost?
• Can the bank loan be redeemed without extra payment?
• What does remortgaging cost?
• Can a priority account (prioritetskonto) offset your savings against the debt?

If you expect to sell again after a few years, the redemption terms may matter more than a small difference in the starting rate.

How to compare two loan offers

Step 1: make the offers alike

Use the same:

• Net proceeds
• Term
• Repayment profile
• Payout date
• Tax assumption

Step 2: compare the starting position

Look at:

• Principal
• Bond price
• Set-up costs
• Payment before tax
• Payment after tax
• Administration margin or interest margin

Step 3: compare how things develop

Look at:

• Outstanding debt after 5, 10 and 20 years
• Payment after the interest-only period
• Payment at a higher interest rate
• Total repayment

Step 4: compare the way out

Look at:

• Redemption method
• Bond price risk
• Notice periods
• Fees
• Option to remortgage

Step 5: look at the whole customer relationship

Check whether the offer requires:

• Salary account
• Insurance
• Pension
• Investments
• Payment card
• Other bank products

An attractive loan may be tied to prices elsewhere in the customer relationship.

Comparison table for your offers

Questions for the bank

• How much do I actually get for the home purchase?
• Which costs do I pay in cash?
• Which costs are added to the debt?
• What is the difference between the principal and the proceeds in the offer?
• How can the interest rate change?
• How can the administration margin or interest margin change?
• What will the payment be at a 1, 2 and 3 percentage point higher rate?
• What happens when the interest-only period ends?
• What is the outstanding debt after 5 and 10 years?
• What does it cost to redeem the loan after 3, 5 and 10 years?
• Which assumptions lie behind the APR and total repayment?
• Does the offer require other products at the bank?
• How long is the offer valid?
• What does price hedging cost?

Common misunderstandings

The principal is the amount I get paid out

Not necessarily. The bond price and costs can make the net proceeds lower.

The lowest interest rate is always the cheapest

No. Administration margin, bond price, fees, repayments and term affect the overall economics.

The lowest APR is always the best loan

No. The APR is strongest when comparing similar loans. Risk, outstanding debt and flexibility must also be taken into account.

A fixed rate means the whole payment is fixed

No. The bond rate is fixed, but the administration margin and certain fees can change.

Repayments are a cost

Repayments are a payment, but they also reduce the debt. Interest, administration margin and fees are the costs of the financing.

Outstanding debt is the amount I have to pay when I sell

Not always. The redemption amount can depend on the market price and the loan terms.

Total repayment is known on a variable-rate loan

Not precisely. The calculation is based on assumptions about the future interest rate.

The monthly payment after tax is a guaranteed amount

No. It is based on tax assumptions and can differ from your actual finances.

Summary

Read the loan offer in this order:

1. Net proceeds
2. Principal and bond price
3. Interest rate and borrowing rate
4. APR
5. Administration margin or interest margin
6. Payment before and after tax
7. Outstanding debt
8. Redemption terms

Only compare offers on the same amount, term and repayment profile. Then look at what can change and how the debt develops.

The financing also has to fit into your overall home finances. You can bring together the purchase price, your own money, loans and transaction costs in the Purchase Budget calculator, and work out the monthly payment in the monthly payment calculator.

Also read the guides on mortgage loans and bank loans, purchase budget and down payment on a home.

BoligKlar gives you a second pair of eyes and an overview. The bank and the mortgage credit institution set the specific prices, calculations and terms.

Frequently asked questions