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How to Prepare for Your Meeting with the Bank About Your Home Loan

Are You Buying a Home? Here's What You Need to Know About Financing

When buying a home, you may encounter terms like debt-to-income ratio, loan-to-value ratio, interest adjustment, contribution rate, and APR. If you’re not familiar with them yet, don’t worry—we’ll help you understand these terms so you can make well-informed decisions.

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How Much Can You Borrow?

A common rule of thumb is that you can afford to buy a home priced at 3-4 times your household’s annual gross income. For example, if your annual household income is DKK 1,000,000, you could look at homes in the DKK 3-4 million range.

However, the exact amount you can borrow is determined on an individual basis.

  • In some cases, banks may allow a higher debt-to-income ratio (the ratio of your total debt to your income). This could apply if you have a significant disposable income or other assets.

  • Debt-to-income over 4: If your debt exceeds four times your income, it could limit the types of mortgage loans available to you.

Consider Your Disposable Income

It’s important to evaluate your disposable income (rådighedsbeløb), which is the amount left over each month after fixed expenses.

Ask yourself: Are you willing to stretch your finances to afford your dream home, potentially sacrificing vacations or dining out?

  • The bank typically requires a disposable income of:

    • DKK 7,000 for a single adult.

    • DKK 12,000 for a couple.

    • DKK 2,500 per child.

Three Key Factors Before Choosing a Loan

  1. Savings:

    • You must provide at least 5% of the purchase price as a down payment. For a property costing DKK 3 million, you’ll need DKK 150,000 in cash for the down payment.

  2. Disposable Income:

    • Banks assess how much money you have left after paying fixed expenses to determine your ability to manage loan repayments.

  3. Debt-to-Income Ratio:

    • Your total debt should not exceed 3.5-4 times your gross income. For example, if your gross income is DKK 500,000, your maximum debt should be DKK 1.75 million.

Try a Loan Calculator

Many banks offer online loan calculators to give you an estimate of how much you can borrow. Typically, you’ll need to input:

  • Income: Your monthly or annual gross household income.

  • Savings: Your available savings for the down payment.

  • Debt: Your total existing debt.

It’s a good idea to test multiple calculators, as results may vary depending on the bank’s policies.

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Get a Pre-Approval (Loan Certificate)

A loan certificate (lånebevis) is a pre-approval from the bank, giving you clarity on how much you can borrow. It allows you to act quickly when you find your dream home, making your house-hunting process more focused and efficient.

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Feeling Overwhelmed by the Process or Legalities?

A lawyer or buyer’s agent (købermægler) can provide valuable support throughout the process. While the cost of hiring an independent, personal buyer advisor varies based on your needs, you should expect to pay between DKK 10,000-15,000 for comprehensive assistance.

This investment can ensure you’re well-prepared to make the right decisions and start your home-buying journey on the right foot.

Drømmen om at købe en bolig kræver en solid forståelse
af de økonomiske begreber bag boliglån.

Her er nogle af de vigtigste termer, der vil hjælpe dig på vej
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Debt factor

  • This represents the ratio between your total debt and your household's annual gross income.

  • To approve a loan, most banks require your debt-to-income ratio to stay below 3.5 - 4, unless there are special circumstances.

Grace period

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  • This type of loan allows you to postpone repayments on the principal for a set period.

  • While it can free up liquidity, it results in higher total costs over the lifetime of the loan.

Loan-to-value ratio

  • This indicates the percentage of the property’s value you can finance through loans.

  • Typically, a mortgage loan (realkreditlån) can cover up to 80% of the property’s value.

Contribution rate

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  • This is an ongoing fee paid to the mortgage lender for administration and risk associated with the loan.

  • The contribution rate is determined by the loan-to-value ratio (belåningsgrad).

Interest adjustment

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  • Mortgage loans can have either fixed or variable interest rates.

  • With a variable interest rate, the rate is adjusted periodically, which can impact your monthly payments.

ÅOP
(Annual Costs
in Percent)

  • ÅOP combines interest rates, fees, and other costs into a single percentage to give you a complete picture of the loan’s total costs.

  • ÅOP allows you to compare different loan options effectively.

The importance of the debt factor for your home loan

Understanding the Debt-to-Income Ratio (Gældsfaktor) in Home Buying

When planning to buy a home, the debt-to-income ratio (gældsfaktor) is one of the most important financial indicators you need to understand. The debt-to-income ratio shows the relationship between your total debt and your household's annual gross income, and it’s a key metric banks use to assess your financial stability. Knowing how it works can help you make more informed decisions about how much you can and should borrow.

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What is the Debt-to-Income Ratio?

The debt-to-income ratio is calculated as your total debt divided by your annual household income before tax.

For example:

  • If your total debt after purchasing a home is DKK 1,500,000 and your household’s gross income is DKK 500,000, your debt-to-income ratio is 3.0.

  • Banks typically prefer this ratio to be no higher than 3.5, as it indicates a manageable level of debt.

  • Low Debt-to-Income Ratio: Suggests your debt is manageable relative to your income.

  • High Debt-to-Income Ratio: May signal financial strain and reduced borrowing capacity.

How Does the Debt-to-Income Ratio Impact Your Loan Options?

A low debt-to-income ratio can:

  • Give you access to better loan terms, such as lower interest rates and fees.

  • Increase your options for flexible loans, like interest-only mortgages or adjustable-rate loans.

A high debt-to-income ratio can:

  • Make it harder to get loan approval.

  • Limit your options to more restrictive or expensive loan types.

Exceptions:
Banks may allow a higher debt-to-income ratio (up to 4.0) if:

  • You have a large savings or significant assets.

  • Your disposable income is high after accounting for monthly expenses.

However, a higher ratio might still restrict the types of mortgage loans available to you.

Why is the Debt-to-Income Ratio Important?

The debt-to-income ratio isn’t just a bank requirement—it’s also a useful tool for you to ensure you don’t overextend yourself financially.

  • High Ratio Risks: If your debt-to-income ratio is too high, you may struggle to cover fixed expenses while affording everyday needs and desires, such as vacations or dining out.

  • Low Ratio Benefits: A lower ratio provides financial flexibility and makes it easier to handle unexpected costs, such as rising interest rates or home repairs.

Optimizing Your Debt-to-Income Ratio

By understanding and managing your debt-to-income ratio, you can enter the home-buying process with a strong financial foundation. This will give you confidence and peace of mind, ensuring that your purchase is both affordable and sustainable for your everyday life.

ÅOP: Understanding the Total Costs of Your Loan

APR (ÅOP): Understanding the Total Costs of Your Loan

When choosing a home loan or any other type of loan, ÅOP (Årlige Omkostninger i Procent), or Annual Percentage Rate, is a crucial factor to consider. It provides a complete overview of the total cost of the loan and helps you compare different loan offers.

What is ÅOP?

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ÅOP is a key figure that expresses the total annual cost of a loan as a percentage of the borrowed amount. It includes not only the interest rate but also all additional fees, such as:

  • Loan origination fees

  • Ongoing administrative fees

  • Contribution rates (bidragssatser)

  • Insurance requirements (if applicable)

ÅOP is more accurate than simply looking at the interest rate because it reflects the true cost of the loan over time.

For example:

  • A loan with a low interest rate but high fees may have a higher ÅOP compared to a loan with a slightly higher interest rate but lower fees.

  • Therefore, focusing on ÅOP is essential when comparing loan offers.

How is ÅOP Calculated?

ÅOP is calculated by considering:

  1. The interest rate on the loan.

  2. One-time costs, such as loan origination fees.

  3. Ongoing costs, such as contribution rates and administrative fees.

  4. The loan term (repayment period).

The formula behind ÅOP accounts for how costs are distributed over the life of the loan, enabling a fair comparison between loans of different sizes and durations.

Why is ÅOP Important?

ÅOP is especially useful because it gives a complete picture of the loan’s true cost, helping you avoid surprises from hidden fees or high contribution rates.

  • A low ÅOP indicates a cheaper loan, but it’s also essential to consider factors such as flexibility and your long-term financial needs.

  • While ÅOP is a reliable indicator, it should be evaluated alongside your overall financial situation.

How to Use ÅOP When Choosing a Loan

  1. Compare ÅOP Across Loan Providers

    • Always use ÅOP to compare loans from different banks and mortgage lenders to find the best offer.

  2. Consider Loan Flexibility

    • A loan with a low ÅOP may have limitations, such as less flexibility for refinancing or adjustments.

  3. Assess the Impact of Loan Term

    • Keep in mind that a longer loan term may result in higher overall costs, even if the ÅOP appears favorable.

Making Informed Decisions with ÅOP

Understanding ÅOP helps you make well-informed choices and avoid unnecessary costs. By focusing on this figure, you can ensure that you’re getting the best possible loan while keeping the overall financial impact manageable.

Always consider ÅOP in conjunction with your financial goals and needs to secure a loan that works best for you.

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