Mortgage loans and bank loans: understand the difference

The mortgage loan (realkreditlån) is normally the largest part. The bank loan (banklån) can cover some of the gap between the mortgage loan and your own money. But the split is not automatically 80, 15 and 5 per cent just because the home costs a certain amount.

The mortgage credit institution (realkreditinstitut) assesses the home. The bank assesses you and your finances. That is why two people can buy at the same price and end up with very different financing proposals.

This was often where I saw the surprise land on the other side of the table. The purchase price was known. But the principal, the bond price, the administration margin, the bank rate and the total payment were still hazy. Those are the numbers we make concrete in this guide.

Short answer

For a home costing 3.000.000 kr., a simple model can look like this:

But the model only holds if the mortgage credit institution values the home at no less than 3.000.000 kr., the bank is willing to finance the 450.000 kr., and you have money for costs and a buffer on top of the 150.000 kr.

So it is not enough to ask: what is the interest rate?

You also need to know:

• What the home has been valued at
• How much you actually receive
• What each loan costs per month
• How quickly the debt falls
• What can change
• What it costs to get out of the loans again

Once those six things are clear, you can read the financing as one overall calculation instead of three separate loans.

In brief

• As a starting point, a mortgage loan can finance up to 80 per cent of the value of an ordinary owner-occupied year-round home (helårsbolig).^[1]
• The limit is calculated from the mortgage credit institution's valuation, which is not necessarily the same as the purchase price.
• A bank loan can finance part of the amount not covered by the mortgage loan and your own money.
• The bank is not obliged to lend exactly 15 per cent.
• As a starting point, you must contribute an appropriate down payment (udbetaling) yourself. 5 per cent is often used as an illustration, but it is not always enough.
• Purchase and loan costs, plus any buffer, come on top of the down payment.
• The mortgage loan has interest, an administration margin (bidragssats), a bond price (kurs) and fees.
• The bank loan typically has interest and fees, but no mortgage administration margin.
• Mortgage loans and bank loans can have different terms, repayment profiles and rate changes.
• The financing as a whole must be assessed together.

The terms first: what do the different parts mean?

A financing proposal can be hard to read because many of the words look alike. Here are the differences in one place, before we go into the loan types themselves.

Your own money

Your own money is the part of the home purchase you pay without borrowing.

It can come from, among other things:

• Savings
• Proceeds (provenu) from selling a previous home
• A gift
• An inheritance
• A family loan, if the bank accepts the arrangement

Your own money often has to stretch further than the down payment itself. You may also need money for land registration (tinglysning), bank and mortgage fees, a buyer's adviser, insurance, moving and the first jobs on the home.

That is why there is a difference between having 5 per cent of the purchase price and having enough money to complete the whole purchase with a sensible buffer afterwards.

Mortgage loan

A mortgage loan is a loan secured on the home. The money behind the loan comes from investors who buy bonds. That is why your loan is tied to the bond market.

For an ordinary owner-occupied year-round home, the mortgage loan can as a starting point make up to 80 per cent of the mortgage credit institution's valuation of the home. This matters: the limit is not automatically calculated from the price you have agreed with the seller.

The price of a mortgage loan typically consists of several parts:

• Interest
• Mortgage administration margin
• Bond price
• Brokerage fees (kurtage) and price spread (kursskæring)
• Set-up fees
• Any price hedging (kurssikring)

So you cannot judge a mortgage loan by looking at the interest rate alone.

Bank loan for the home

The bank loan is often used for the part of the purchase price not covered by the mortgage loan and your own money.

If a home costs 3.000.000 kr. and the mortgage loan is 2.400.000 kr., there is 600.000 kr. missing. If you pay 150.000 kr. yourself, 450.000 kr. is left. The bank can choose to finance that amount as a bank loan.

The bank is not obliged to lend you the remaining amount. It assesses, among other things, your income, debt, savings, disposable income (rådighedsbeløb), job situation, the home and the overall risk.

A bank loan normally has no mortgage administration margin. Instead, the price can consist of:

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

The bank loan often has a shorter term than the mortgage loan. That can make the monthly payment higher, even though the loan amount is smaller.

Priority loan

A priority loan (prioritetslån) is a bank loan secured on the home. It is not necessarily the same as the bank's ordinary top-up financing.

Some priority loans can be used as an alternative to all or part of a mortgage loan. Others are linked to an account where money in the account reduces the amount you pay interest on.

A priority loan is financed by the bank and not through bonds. That is why it normally has no bond price or mortgage administration margin. On the other hand, the interest rate can consist of a reference rate and an individual surcharge, which can change according to the terms of the agreement.

So when you compare a priority loan with a mortgage loan, do not just compare the rate shown. Also look at rate changes, fees, flexibility, repayments, outstanding debt (restgæld) and the terms for paying off the loan.

A charge means the home is security for the loan

When the bank or the mortgage credit institution lends you money for a home, they use the home as security.

This is called a charge (pant). It is not a fee, and it is not something you pay every month. It simply means that the lender has a right in the home if the loan is not repaid.

Both the mortgage credit institution and the bank can hold security in the home.

The order of the loans

The mortgage loan normally comes first in the queue, and the bank loan comes after it.

If the home is one day sold for less than the total debt, the mortgage loan is normally repaid before the bank loan. The bank therefore takes a greater risk on its part.

This is one of the reasons why the bank loan often has a higher interest rate.

Mortgage valuation

The mortgage valuation (realkreditvurdering) is the value the mortgage credit institution judges the home can be borrowed against.

It can be the same as the purchase price, but it can also be lower. If you buy for 3.000.000 kr. and the home is valued at 2.800.000 kr., a mortgage limit of 80 per cent is calculated from 2.800.000 kr.

That gives a possible mortgage loan of 2.240.000 kr. before other restrictions. The gap between the purchase price and the mortgage loan must be covered by your own money or other financing the bank approves.

Loan-to-value ratio

The loan-to-value ratio, LTV (belåningsgrad) shows how large a share of the home's value is borrowed against.

If the home is valued at 3.000.000 kr. and the mortgage loan is 2.400.000 kr., the mortgage LTV is 80 per cent.

The loan-to-value ratio can affect:

• How much can be borrowed as a mortgage loan
• The size of the mortgage administration margin
• The bank's risk
• The option of an interest-only period
• The option of later top-up loans

The loan-to-value ratio is not the same as the debt-to-income ratio (gældsfaktor). The loan-to-value ratio compares loans with the home's value. The debt-to-income ratio compares the household's total debt with its income.

Read more in the guide on debt-to-income ratio when buying a home.

The principal is the amount stated on the loan

The principal (hovedstol) is the amount you start out owing on the loan.

It is not always the same as the amount that goes into the home purchase. If the bond price is below 100, or some costs are added to the loan, the debt can be higher than the money you get for the home.

So if the loan says 2.450.000 kr., a lower amount may well end up in the home purchase itself.

Read the in-depth guide on the principal of a home loan.

Proceeds are the money the loan gives you

Proceeds is the banking word for the money the loan raises.

Once the bond price and costs have been deducted, you are left with the amount that can actually be used in the home purchase. This is often called net proceeds (nettoprovenu).

So the most important question is not only: how big is the loan?

It is also: how much money does the loan actually give me for the home?

Two loans with the same debt can give different amounts for the home purchase if the bond price and costs differ.

Interest

Interest is the payment for borrowing the money.

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

A bank loan can also have a fixed rate or a variable (adjustable) rate. Variable bank rates often consist of a reference rate and an individual surcharge.

The interest rate does not tell you the whole price. The administration margin, the bond price and fees must also be included.

Mortgage administration margin

The administration margin is an ongoing payment to the mortgage credit institution on top of the interest.

The administration margin can depend on, among other things:

• Loan-to-value ratio
• Loan type
• Fixed or variable rate
• Whether the loan has repayments
• Property type
• The mortgage credit institution's pricing structure

A fixed-rate loan has a fixed bond rate, but the administration margin can be changed under the loan terms. A fixed rate therefore does not necessarily mean that the whole payment is locked for all 30 years.

The bond price is the price of the money behind the mortgage loan

Think of the bond price as a gift card.

The gift card says 100 kr. on the front. At a price of 100, it is sold for 100 kr. At a price of 95, it is sold for only 95 kr.

So if you need a certain amount for the home purchase, more gift cards have to be sold when the price is low. Translated into mortgage terms, this means you have to borrow more to receive the same amount.

The bond price can also matter if the loan is to be closed later. That depends on the loan type and the specific terms.

Monthly payment

The monthly payment (ydelse) is the amount you have to pay on the loan in a given period.

It can consist of:

• Interest
• Administration margin or interest margin
• Repayments
• Fees

Repayments (afdrag) are not a cost in the same way as interest and the administration margin. The repayment reduces your debt. But the money still has to fit into your monthly budget.

When you compare payments, check whether they are shown before or after tax, and whether the amount applies per month, quarter or year. How the interest deduction affects your tax is covered in the guide to interest deduction.

APR

APR (ÅOP) stands for annual percentage rate of charge. The figure combines interest and relevant costs into a single annual percentage according to the calculation rules.

APR works best for comparing loans with the same loan amount, term and repayment profile. If one loan has an interest-only period and the other has repayments, the figure compares two different payment paths.

Nor does APR on its own tell you how large the interest rate risk is, or what it costs to get out of the loan early.

Repayments

Repayments are the part of the payment that brings down the debt.

If you pay 12.000 kr. a month, some of it can be interest and administration margin, while the rest is repayment. Only the repayment reduces the outstanding debt.

A loan with high repayments can have a higher monthly payment, but leave you with less debt later.

Interest-only period

An interest-only period (afdragsfrihed) means that for a period you do not pay down the loan according to the normal plan.

You still pay interest, the administration margin and any fees. The administration margin is often higher on a mortgage loan without repayments.

When the period ends, the payment can rise because the debt has to be paid off over the remaining term. An interest-only period therefore does not make the loan free. It moves part of the repayment to later.

Term

The term is the period over which the loan is planned to run.

A longer term often gives a lower monthly payment because the repayments are spread over more years. On the other hand, you typically pay interest for longer.

A shorter term often gives a higher payment now, but brings down the debt faster.

Outstanding debt

The outstanding debt is the amount left on the loan after the repayments you have made.

The outstanding debt is not always the same as the redemption amount. On bond-based loans, the amount needed to close the loan can also depend on the bond price, notice rules, timing and fees.

Total amount repayable

The total amount repayable is the amount you are expected to pay over the whole term of the loan, based on the assumptions in the offer.

The amount normally includes both:

• The amount you have borrowed
• Interest
• Administration margin or interest margin
• Relevant costs

A large total amount repayable therefore does not mean that the whole amount is a cost. The loan amount itself is also paid back.

On variable-rate loans, the calculation is based on assumptions about future interest rates. The actual amount can therefore turn out differently.

How the parts fit together

Imagine a home costing 3.000.000 kr.:

Once the loans are set up, you then need to look at:

1. How large the net proceeds will be
2. What you pay in interest and administration margin or interest margin
3. How much you repay
4. What the total monthly payment is
5. How the payment can change
6. How large the outstanding debt is after 5 and 10 years
7. What it costs to pay off the loans

Only then do you have the full picture. The lowest rate on one line does not on its own tell you which financing is cheapest or suits your finances.

The three layers of home financing

A typical financing package can consist of:

Together, the three parts must cover:

• The purchase price
• Land registration
• Loan costs
• Professional guidance
• Insurance
• Any initial work on the home
• The buffer that should be left after the purchase

So it is not enough to have money for just a percentage of the purchase price.

What do 80, 15 and 5 mean?

The model is often used as a simple illustration:

For a home costing 3.000.000 kr., it looks like this:

It is only a model.

It does not tell you:

• Whether the mortgage credit institution values the home at 3.000.000 kr.
• Whether the bank will lend 450.000 kr.
• Whether 150.000 kr. is an appropriate down payment in your case
• How the costs are financed
• Whether your disposable income can carry the payments
• Which loan types the bank will approve

Forbrug.dk describes 80, 15 and 5 as a common starting point, but the financing still requires specific approval.^[2]

The mortgage limit follows the valuation

The mortgage credit institution assesses the specific property before the loan is offered.

For an ordinary owner-occupied year-round home, the mortgage loan can as a starting point make up to 80 per cent of the value the institution can use as its basis.

That value can be:

• The same as the purchase price
• Lower than the purchase price
• In special situations, assessed on factors other than the agreed price

A high purchase price therefore does not automatically give access to a correspondingly larger mortgage loan.

Example: the valuation is lower than the purchase price

You buy a home for 3.000.000 kr., but the mortgage credit institution values it at 2.800.000 kr.

If you put 150.000 kr. of your own into the purchase price, 610.000 kr. is still missing in the simplified example, before costs.

The bank has to decide whether it will finance the rest. There is no automatic right to the bank loan.

What is a mortgage loan?

A mortgage loan is a loan secured on real property and funded through bonds.

There is a direct link between the loan and the bonds behind it. Market interest rates and the bond price therefore affect the loan's price, proceeds and redemption.^[3]

The mortgage loan can be, among other things:

• A fixed-rate bond loan
• An F-kort (a variable-rate loan with a short reference rate) or another short-term variable-rate loan
• F1, F3 or F5 (adjustable-rate loans where the rate is reset every one, three or five years)
• A loan with repayments
• A loan with a period without repayments

The price typically consists of:

• Interest
• Mortgage administration margin
• Bond price effect
• Brokerage fees and price spread
• Set-up fees
• Land registration fee (tinglysningsafgift)
• Any price hedging

What is a bank loan for the home?

The bank loan is often used as top-up financing for the part of the purchase price that the mortgage loan and your own money do not cover.^[4]

The bank loan can have:

• A fixed or variable rate
• An individual interest margin
• A shorter term than the mortgage loan
• A charge on the home ranking after the mortgage loan
• Set-up fees
• Conditions about other products at the bank

The bank's risk is different because the loan often sits at the outermost layer of the financing. That can affect the price.

The interest rate is set based on, among other things:

• The household's finances
• The size of the loan
• The security in the home
• The bank's credit policy
• The overall customer relationship
• Term and repayment profile

A bank loan is therefore not one standard product with one market rate.

What is a priority loan?

A priority loan is a bank loan secured on the home, which in some cases can be used instead of, or together with, a mortgage loan.

It can be linked to an account where the balance reduces the amount interest is calculated on. Other priority loans work more like traditional loans.

Forbrug.dk describes how certain priority loans can finance up to 80 per cent of the home's value. They normally have no mortgage administration margin, but can have an interest margin and a different pricing structure.^[2]

A priority loan should therefore not be confused with the ordinary bank loan covering, for example, the outermost 15 per cent.

Three kinds of home loan at the bank

Banks have three different kinds of home loan. They do different jobs and cannot be compared directly with each other. So only compare a bank loan with a loan of the same type, and compare a priority loan with the mortgage loan's interest rate plus administration margin.

How offsetting works

Offsetting (modregning) means that money you have saved makes your loan cheaper. It comes in two forms, and they do not give the same result.

Example: You borrow 400.000 kr. at 5 per cent and have 100.000 kr. saved. With the balance on the credit line, you pay interest on 300.000 kr. That comes to 15.000 kr. a year. With a separate account at the loan's rate less 0,5 percentage points, you pay 20.000 kr. in interest, and the account earns 4.500 kr. Net, that is 15.500 kr. Without offsetting, you pay 20.000 kr., and your savings earn the ordinary rate. The figures are BoligKlar's example and not a bank's price. The benefit depends on how much money you have saved. If you want to compare administration margins and fees on mortgage loans, you can see them side by side in the guide Compare home loans.

Mortgage loans and bank loans compared

Charges and order of priority

A charge gives the lender security in the home.

The mortgage loan normally has the best priority. The bank's top-up financing often ranks after the mortgage loan.

If the home later has to be sold at a loss, the loans are paid off in their order of priority. The lower-ranking security can therefore mean greater risk for the bank.

The order of priority can affect:

• The interest rate
• The bank's credit assessment (kreditvurdering)
• The requirement for your own money
• The option of later top-up loans
• The costs of land registration

This does not mean that the bank always has a new, separate mortgage deed (pantebrev). The security can be structured in different ways, and land registration fee paid previously can in some purchases be reused in full or in part.

Interest, administration margin and interest margin

It is important to compare the right parts of the price.

The mortgage loan

The ongoing payment can consist of:

• Bond rate
• Administration margin
• Repayments
• Any price spread on refinancing
• Fees

The bank loan

The ongoing payment can consist of:

• Base rate or reference rate
• Individual interest margin
• Repayments
• Ongoing fees

A fixed rate is not a fixed total price

A fixed-rate mortgage loan has a fixed bond rate. The mortgage credit institution can change the administration margin under the terms. Forbrug.dk describes how the administration margin rate can rise during the loan period.^[2]

A bank loan with a variable rate can change according to the bank's rate basis and individual surcharge.

The bond price explained with a gift card

Imagine a gift card with 100 kr. printed on the front.

At a price of 100, the gift card is sold for 100 kr. At a price of 98, it is sold for 98 kr. At a price of 95, it is sold for 95 kr.

It is the same idea with a mortgage loan. When the price is below 100, you receive less money than the amount you sign up to owe.

If you need 2.400.000 kr. for the home, the simplified calculation looks like this:

At a price of 98, in this example you have to borrow approximately 48.980 kr. more than at a price of 100.

At a price of 95, you have to borrow approximately 126.316 kr. more. You still only get 2.400.000 kr. for the home, but you start with a larger debt.

So the bond price is not a fee. It tells you how many kroner you get out of every 100 kr. you borrow.

A traditional bank loan is normally paid out as a cash amount without this bond price. On the other hand, the bank has its own interest rate and its own fees.

Read more in the guides on the principal and fixed or variable rate.

Term and repayments

The mortgage loan can normally have a longer term than the bank loan.

A short bank loan can mean:

• Higher monthly repayments
• Faster reduction of the bank debt
• Lower outstanding debt after a number of years
• More pressure on your disposable income now

A longer bank loan can mean:

• Lower payments now
• Slower reduction of the debt
• More years of interest costs
• A higher total amount repayable, if other terms are the same

Compare both the payment and the outstanding debt before you choose a term.

An interest-only period affects the whole financing

Depending on the product and approval, a mortgage loan can have an interest-only period.

This does not necessarily mean that the whole home financing is interest-only. The bank loan may still require repayments.

When the interest-only period ends, the payment on the mortgage loan can rise because the debt has to be paid off over the remaining term.

Redemption and flexibility

Mortgage loans and bank loans have different rules for getting out of the loan.

Mortgage loan

Redemption can depend on:

• The market price
• Whether the loan is callable
• The option of redeeming at a price of 100
• The timing of the rate reset
• Notice periods
• Brokerage fees and other fees

Bank loan

A traditional bank loan can often be paid off at the current outstanding debt, but you should check:

• Fees
• Notice rules
• Any compensation on a fixed rate
• Terms for extra repayments
• Whether other prices at the bank change

Flexibility has value, but it must be weighed against price and risk.

Your own money must cover more than the down payment

Assume the home costs 3.000.000 kr. and you have 200.000 kr. saved.

If 150.000 kr. is used as your own money towards the purchase price, 50.000 kr. is left.

The remaining money may have to cover:

• Land registration
• Loan fees
• Professional guidance
• Insurance
• Moving
• Renovation
• A buffer after the purchase

If the costs are higher than the remaining 50.000 kr., the difference must be covered some other way.

Read the guide on the down payment for a home and the full guide on what it costs to buy a house.

Three simplified financing examples

All the examples are based on a home costing 3.000.000 kr. and leave out purchase costs.

Example A: the minimum model

The bank loan is relatively large, so the total payment depends both on the mortgage loan and on the bank's interest rate and term.

Example B: more of your own money

The bank loan disappears in the simplified example. The buyer still needs money for costs and the desired buffer.

Example C: lower mortgage valuation

The bank's share grows because the mortgage valuation is only 2.800.000 kr.

The examples show why the purchase price alone does not determine the financing.

Your total monthly finances

Look at the mortgage loan and the bank loan together.

Simplified payment example

The figures are illustrative. The actual payment depends on interest rates, debt, term, administration margin and payment frequency.

The repayments reduce the debt, but they still have to be affordable every month.

The bank also looks at owner costs (ejerudgift), heating, insurance, transport and other fixed expenses. That is why your disposable income can set a lower purchase budget than the 80-15-5 model suggests.

Read the guides on disposable income and debt-to-income ratio.

If the bank will not finance the rest

If the mortgage loan and your own money do not cover the purchase price, the rest requires an approved solution.

The bank can, among other things:

• Approve the bank loan you asked for
• Approve a smaller amount
• Require more of your own money
• Propose a different loan mix
• Set requirements for repayments or term
• Turn down the financing

A bank condition (bankforbehold) in the purchase agreement (købsaftale) can be relevant if the final financing is not in place. Its scope depends on the wording.

Read the guide on lawyer and bank conditions.

How to compare financing proposals

Compare proposals with the same:

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

Then look at the whole package:

Read the practical guide Understand your loan offer.

Questions for the bank

• What value has the mortgage credit institution used?
• How large will the maximum mortgage loan be?
• How much of my own money must go towards the purchase price?
• How much of my own money must go towards costs?
• How large a buffer is left?
• How large will the bank loan be?
• Does the bank have a charge, and what priority does it get?
• What are the interest rate and the interest margin?
• Can the rate be changed, and with how much notice?
• What is the mortgage administration margin?
• What is the total payment before tax?
• What will the payment be if interest rates rise?
• What is the outstanding debt after 5 and 10 years?
• What does it cost to pay off both loans?
• Do the prices require other products at the bank?

Common misunderstandings

The mortgage loan is always 80 per cent of the purchase price

No. The limit follows the mortgage credit institution's valuation.

The bank has to lend the next 15 per cent

No. The bank loan requires a specific credit approval.

5 per cent of your own money is always enough

No. Costs, the valuation, an appropriate down payment and a buffer can require more money.

The mortgage loan only has an interest rate

No. The administration margin, the bond price and fees also affect the price.

The bank loan always has a higher monthly payment

Not necessarily. It depends on the interest rate, term and repayments. It can, however, be more expensive in terms of interest and at the same time have a shorter term.

A fixed rate means a fixed total payment

No. The bond rate is fixed, but the administration margin and other prices can change.

A bank loan and a priority loan are the same thing

Not necessarily. A priority loan can be an alternative form of bank financing covering a larger share of the home's value.

If I put in 20 per cent myself, I never need a bank loan

Not automatically. The valuation, price loss (kurstab) and costs can still create a financing need.

In short

The mortgage loan, the bank loan and your own money are parts of the same calculation.

The 80-15-5 model is only a starting point. The mortgage credit institution's valuation can change the mortgage loan, and the bank decides after a specific credit assessment whether it will finance the rest.

So look at:

1. The mortgage valuation
2. The net proceeds
3. Your own money for both the purchase price and costs
4. The total monthly payment
5. The outstanding debt after 5 and 10 years
6. The terms for rate changes and redemption

You can bring together the purchase price, your own money, mortgage loan, bank loan and transaction costs in the Purchase Budget calculator. Work out the monthly payment in the monthly payment calculator, and the Loan Choice Check shows which loans you are allowed to choose.

Also read the full guide on the purchase budget when buying a home.

BoligKlar gives you a second pair of eyes and an overview. The bank and the mortgage credit institution carry out the specific credit assessment and property valuation.

Frequently asked questions