October 1 sees the introduction of the new mortgage loans with interest-only options, however, it is still uncertain what constructions will be possible due to the problems posed by the Danish Land Registration Act. In the article Henrik Arp and Jens Peter Sørensen look at the types of borrowers likely to opt for the new loans, and how this will affect prepayment behaviour among existing borrowers.
The two authors also look at the price difference between traditional 30-year bonds and the new bonds funding interest-only loans.
Henrik Arp and Jens Peter Sørensen expect a general issuing pressure on 30-year 6% bonds, higher prepayment risk as regards the existing 6% bonds, whereas eight and seven per cent loans will hardly be affected - borrowers in these segments have already had ample opportunity to remortgage. A certain activity from interest-reset loans to fixed-rate loans with an interest-only option must also be anticipated. And if the recent increase in yields is maintained in the months ahead, borrowers may be inclined to refinance 5'35 loans by 6% 43D 2035 loans.
Read the article "Mortgage loans with interest-only options" in Focus no. 63 at the Exchange's website www.cse.dk, and see the webcast (in Danish) with Henrik Arp. Questions to the authors may be sent to the e-mail address: info@cse.dk until 12 September 2003.