Guide to borrowing money for housing

Borrowing money for a home is one of the biggest financial commitments individuals can take on. It can be an excellent investment personally and financially, but it can also go the other way, so it is not without risk. It is therefore important to have a good understanding of how it works when borrowing money.

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How to borrow money to buy a home?

If you are thinking of buying a home, you should know that there are a number of different ways to finance your purchase. However, all types of loans require you to have your personal finances in order. The bank will therefore look at your general finances and make a credit assessment of you. Therefore, it is a good idea to make sure that you have the following in order.

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_{1. financial history and creditworthiness}

Try as far as possible to have stability in your financial history. This means a steady income, low debts and no defaulted obligations. If you have a surplus in your finances and have paid off previous loans on time, the bank is more likely to lend you money again.

_{2. Income and fixed expenses}  

It's easier said than done, but the more you earn, the more you can borrow. However, it's not just the size of your income that matters. If you earn a lot but have a high level of consumption, the bank may decide that your finances are not sufficient to borrow money to buy a home. 

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If you have a job with a variable income, such as self-employment or commission, or you have no income for a few months, this can be a bad signal to send to the bank. The bank wants to see a fixed, stable income so they can rely on you to pay on time. 

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How much money can I borrow to buy a home?

There are a few rules of thumb when calculating how much money you can borrow to buy a house. This is an example of how to structure a loan to buy a house. 

_{Mortgage loans}

With a mortgage loan, you can typically borrow up to 80% of the value of your home. This type of loan is popular because mortgages have lower interest rates than bank loans. 

This is because the mortgage lender takes a mortgage on the house you buy. Therefore, lending is highly secure, as the mortgage lender can demand that the house be sold so that the debt can be repaid in the event of default.  

_{Bank loans}

You must either pay the remaining 20% yourself or combine it with a bank loan. There will typically be a minimum of 5% down payment from your own pocket, so you should expect to have saved at least DKK 50,000 per million kroner you want to buy a home for.

What does it take to borrow money from a bank?

To sum up, if you want to borrow money to buy a house, you need to have healthy, stable finances and a good credit rating. If there are more people in the household sharing the expenses, you will have a higher income and therefore a better chance of being able to borrow money from the bank.

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You also need to have savings to cover at least 5% of the value of the property. If you are planning to buy a house, this may mean that you need to have a good level of savings. If the house costs DKK 5 million, you will need to have saved up a quarter of a million. 

When the loan is taken out, you will receive a mortgage deed as security for a loan. You can read more about mortgage deeds here. You should also be familiar with the concept of loan proceeds if you're in the process of looking for a loan.

Should I borrow the money at a fixed or variable rate?

When borrowing money to buy a home, you can choose between a fixed or a variable interest rate. Both types have their advantages and disadvantages. 

_{Fixed rate loan} 

A fixed-rate loan is the most common type of home loan in Denmark. The interest rate is fixed for the entire term, which can be up to 30 years. If you would like to borrow money for a home with a fixed-rate loan, you should consider the advantages and disadvantages of this type of loan, which we will go through here. 

_Advantages

• As the interest rate is fixed, you can plan your fixed costs for the entire duration of the loan. This provides stability and predictability in your finances, as you don't have to worry about interest rates rising. It is therefore the least risky type of loan. 
• If you expect the interest rate to be lower on a fixed-rate loan than a variable-rate loan, you may end up paying less in interest. 

_{Disadvantages}

• However, it can also go the other way. If market interest rates fall, you risk paying a higher average interest rate than if you had chosen a variable rate loan. 
• A fixed-rate loan typically has a higher initial interest rate, which means that there are many expenses at the beginning of the loan period. 
• The fixed-rate loan is less flexible. As the interest rate and the period of the loan are fixed, a fixed-rate loan is less flexible than other types of loans. 

Variable rate loans

A variable-rate loan is a good option if you don't need the financial stability and predictability of a fixed-rate loan. 

_Advantages

• You can save money if interest rates fall. If market interest rates fall, you can save money on your loan and end up paying less in interest. 
• It is more flexible. Unlike fixed-rate loans, a variable-rate loan offers more flexibility, allowing you to adapt it to the market and your personal finances. 

_{Disadvantages}

• It is more difficult to plan your spending. As interest rates can go up and down, you can have both positive and negative experiences. This makes your finances less predictable and therefore less stable. 

Which bank will lend me money to buy a house?

Finding a bank to lend you money depends on a number of factors. So there is no one bank that is the best fit for everyone. It is therefore advisable to seek advice from several different banks. This will allow you to obtain offers and assess what is best suited to your particular financial situation. 

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There may be several reasons why one bank suits you better than another. The price of a loan can vary from bank to bank, as can the quality of advice. It is therefore a good idea to start a dialog with 2-3 banks. You can then get a quote from each one and assess them on price and service. 

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If you're still hitting a brick wall and can't get help from a bank, you could consider alternative financing options, such as crowdlending, which you can find out more about here. 

Summary - what to look out for when borrowing money to buy a home

1. Make a realistic budget. The budget should include your household's expected income and expenses. The budget is both to plan your own finances, but also to give the bank an idea of how much you can borrow. It provides a basis for assessing how expensive a home you can afford to buy.
2. Type of loan. There are several different types of loans from mortgage lenders and banks with fixed or variable interest rates. Find out what best suits your finances and risk appetite.
3. Self-payment. It is important to have savings so that you can finance part of the cost of buying a home yourself. The rule of thumb is 5%, but it's better to save more to be on the safe side.
4. Loan rescheduling. Find out what the options are for rescheduling your loan if the market or your financial situation changes. 
5. Find the bank that suits your needs. There are many banks to choose from. Get several offers so you can find the best one for your particular situation.
6. Advice. Work with a housing lawyer once you have a purchase agreement. This will ensure that everything is as it should be and you won't have any negative surprises. 
7. Insurance. It is important that you are covered if there are defects in the property you buy. Take out homeowners' insurance to protect yourself against unforeseen expenses.

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