Homeowners use of refinancing gains and proceeds from supplementary loans in based on a survey conducted by Synovate, a research company, on

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1 Homeowners use of refinancing gains and proceeds from supplementary loans in based on a survey conducted by Synovate, a research company, on behalf of the Association of Danish Mortgage Banks 2009

2 Homeowners grew even more cautious in 2009 On behalf of the Association of Danish Mortgage Banks, Synovate, a research company, has conducted a survey on borrowers use of refinancing gains and proceeds from supplementary loans in A corresponding survey has been conducted every year since This report presents the conclusions of the 2009 survey. 2 Interest rates and market prices fluctuate. Borrowers refinance their mortgage loan when they are able to obtain financial gains, typically every five years. The gains may be lower loan payments, lower interest rate sensitivity at the same cost or a reduction in the debt outstanding. Transparency prevails in the Danish mortgage system. Borrowers refinance mortgage loans at current market prices quoted on the stock exchange. This is unique by international standards. In other European countries, prepaying housing loans is typically an expensive and complex process. Lenders must be compensated for loss of profits. Prepayment is subject to negotiation, and borrowers cannot look up prepayment prices in official price lists. Since 2003, the Association of Danish Mortgage Banks has conducted an annual survey on Danish borrowers use of refinancing gains and cash proceeds from supplementary loans in cooperation with Synovate. The latest survey was conducted in the spring of It was based on telephone interviews with 1,000 homeowners who all refinanced their loan and/or raised a supplementary loan in The purpose is to uncover the scope and use of the financial gains offered by the unique Danish prepayment system. FINANCIAL TURMOIL HAS SUBSIDED The worst financial turmoil subsided in the first months of A depressed economy slowly started gaining momentum. The housing market started to recover. Short-term rates fell to a record low, triggering a mortgage refinancing surge. Homeowner s equity was down along with house prices. Fewer than in previous years raised supplementary mortgage loans. The 2008 survey revealed that during the financial crisis, borrowers had become more cautious and conservative than in previous years about the use of refinancing gains and cash proceeds from supplementary loans. More borrowers gave priority to savings and investments at the expense of consumption. The same pattern applies to the 2009 survey. This shows that borrowers size up the current economic climate when making decisions about the use of refinancing gains and cash proceeds from supplementary loans. REFINANCING SURGE IN 2009 DKK 326bn-worth of mortgage loans were refinanced in This is a record since 2005 and represents a rise of 25% on Adjustable-rate mortgages (ARMs) became very popular among borrowers, who raised these loans at the expense of fixed-rate loans. Fewer borrowers raised supplementary loans. The survey shows that around 12% of Danish homeowners either refinanced their mortgage loan or raised a supplementary loan in This corresponds to 190,000 of Denmark s nearly 1.6m homeowners. About 140,000

3 CONTENTS OF THE SURVEY The survey covers a number of themes relating to borrowers concerns and decisions in the lending and refinancing markets. The themes are: 3 homeowners refinanced their mortgage loan, while 93,000 raised a supplementary loan in The average principal of refinanced loans was DKK 1,450,000 in More specifically: 98,000 borrowers (6.1% of all borrowers) refinanced their mortgage loan without raising a supplementary loan 43,000 borrowers (2.7% of all borrowers) refinanced their mortgage loan and also raised a supplementary loan 50,000 borrowers (3.2% of all borrowers) only raised a supplementary loan. A closer look at the Table reveals that: 115,000 borrowers obtained lower payments on their mortgage loan after refinancing. This corresponds to 7.2% of all borrowers. On average, loan payments were reduced by about DKK 3,829 (gross) a month: 43,000 borrowers raised a supplementary loan in connection with the refinancing of their existing loan in This corresponds to 2.7% of all borrowers. The average proceeds disbursed were DKK 175, ,500 borrowers only raised a supplementary loan in The average proceeds disbursed were DKK 600,000. In other words, the aggregate amount of supplementary loans raised in 2009 was about DKK 37bn, and loan payment reductions totalled about DKK 5.3bn COMPARED WITH 2008 About 115,000 borrowers obtained a reduction in their loan payments in 2009 as a result of refinancing. This means that eight in ten borrowers who refinanced their mortgage loan obtained lower loan payments. On average, loan payments were reduced by about DKK 3,829 (gross) a month, corresponding to total loan payment reductions of DKK 441m a month or around DKK 5.3bn a year for Danish homeowners. Loan refinancing/supplementary loans Did you refinance? Did you obtain lower loan payments (how much lower)? Did you obtain loan proceeds (how much)? How do you spend any increase in your discretionary income? How do you spend any loan proceeds? Was your debt outstanding reduced (by how much)? Advice and information Which sources of information did you apply? Are you satisfied with the advisory services received? Are interest-only loans risky? How was the quality of the advice and information you received on interest-only loans and adjustable-rate mortgages? The refinanced loan What is the principal of the refinanced loan? Which type is the new loan? What is the term of the new loan? How long is the interest-only period? Secured bank loans Knowledge of secured bank loans? Reasons for choosing mortgage loan over secured bank loan? Are the advantages and disadvantages of the loans transparent? Competition Did you obtain offers from other lenders? Did you change mortgage banks? Background information Age Type of dwelling Household income Geography Property value Homeowner s equity

4 Table 1: Loans refinanced and supplementary loans raised in 2009 SHARE (% AND NUMBER) Respondents All borrowers Avg monthly reduction Avg proceeds % Number % Number DKK DKK Only refinanced loan ,219 of which: * Obtained lower loan payments ,447 3,983 Refinanced loan and raised supplementary loan , ,923 of which: * Obtained lower loan payments ,9 30,881 3,407 Only raised supplementary loan , ,894 TOTAL , ,625 of which: * Obtained lower loan payments 60, , Table 2: Loan refinancing and refinancing gains in 2008 and 2009 Number of borrowers who refinanced existing mortgage loans 136, ,000 - Of which borrowers who obtained lower loan payments 43,500 (32 %) 115,328 (82 %) - Average loan payment reduction (gross) a month DKK 984 DKK TOTAL LOAN PAYMENT REDUCTION DKK 42m a month About DKK 500m a year DKK 441.5m a month About DKK 5.3bn a year 4 This is a remarkable improvement on In 2008 about 136,500 borrowers refinanced their mortgage loan, and about 43,500 borrowers obtained lower loan payments. This corresponds to three in ten borrowers fewer than in The average loan payment reduction was DKK 984. The total reduction was DKK 42m a month or about DKK 500m a year. In other words, billions of Danish kroner in the form of loan payment reductions were released in 2009 a far higher amount than in The reason was the low interest rate level, but the high amount makes it far more interesting to look at how the money is spent. Fewer borrowers found supplementary loans attractive in 2009 than in previous years. About 93,000 borrowers raised supplementary loans in 2009 against 143,000 in 2008, ie a decline of 35%. Even though more borrowers refinanced loans in 2009 than in 2008, fewer raised supplementary loans at the same time. And the average principal of the supplementary loans raised was lower than in previous years. The typical supplementary loan was DKK 175,000 in 2009 against an average DKK 367,000 in However, if we look at the group of borrowers who only raised supplementary loans, the average cash proceeds increased from DKK 430,000 in 2008 to DKK 600,000 in This is an annual rise in average loan proceeds of DKK 170,000, or 40%. 50,000 borrowers only raised supplementary loans in 2009 a decline on 2008 when the number was 83,000. All in all, the survey indicates that borrowers raised supplementary loans worth approximately DKK 56bn in This is about the same level as in MORE MONEY FUELS SAVINGS AND INVESTMENTS Borrowers have more money to spend due to loan payment reductions of about DKK 5.3bn and the proceeds of DKK 37bn from supplementary loans. This money can be spent on consumption, savings or home improvement, or it can be used to compensate for changes in borrowers financial circumstances.

5 Figure 1: Borrowers use of loan payment reduction and/or refinancing proceeds 70% Increased saving Home investment Compensation for changes in financial circumstances Increased consumption 60% 50% 40% 30% 20% 10% 0% Loan payment reduction after refinancing Proceeds from refinancing combined with supplementary loan Proceeds from raising only supplementary loan RESPONSE CATEGORIES Borrowers were given a wide range of response options. We have divided the responses into the main categories consumption, savings, investments and compensation for changes in financial circumstances. Consumption: Includes the responses increased general consumption, holiday/travel and car/motor cycle/boat. Savings: Includes the responses pension savings, other savings, repayment of other debt, financing of loan payments in respect of other dwelling and investments/purchase of equities/bonds. Home investment: Includes the responses home improvement/decoration/extension and purchase of property/shop/business. Compensation for changes in financial circumstances: Includes the responses compensation for reduced income/improvement of financial situation and financing of addition to the family education divorce other familyrelated event. Borrowers mainly use reductions in loan payments following refinancing to bolster savings. Cash proceeds from supplementary loans are chiefly spent on home maintenance or improvement. This has been the case every year since the first survey in However, the 2009 survey shows that borrowers spend a larger part of any higher discretionary income on savings and home improvement than in previous years, at the expense of consumption. HOW DO BORROWERS USE LOAN PAYMENT REDUCTIONS? As a result of refinancing, 115,000 borrowers obtained a loan payment reduction of about DKK 3,829 (gross) a month. Some of them raised supplementary loans at the same time, others did not. In the survey, these borrowers were asked: On what have you spent or how do you plan to spend your higher discretionary income now that your mortgage payments have been reduced? 52% respond that the financial leeway will be used to increase savings, for example through increased pension contributions or the reduction of other, probably more expensive, debt. In the 2008 survey, the share of borrowers using higher income following loan refinancing to increase savings was 43%. 14% of borrowers expect to use their loan payment reduction to increase consumption. The figure is lower than the year before when 24% of respondents said they expected to spend the gains on consumption. 5 The proportion of borrowers spending refinancing gains on home investment (16%) or using them to compensate for changes in their financial circumstances (12%) is largely unchanged from 2008.

6 Figure 2: Homeowners who only obtained lower mortgage loan payments spent the higher monthly discretionary income this way: 60% 50% 40% Note: In the 2009 survey, adjustments have been made for the questions behind the responses in Figures 2, 3 and 4 regarding borrowers use of the financial leeway resulting from lower loan payments and/or cash proceeds from supplementary loans. The responses from the 2008 survey have been weighted to enable comparison with the 2009 survey. The 2008 survey allowed for multiple responses regarding how the money was spent or was planned to be spent, while the 2009 survey only allowed for one response. Also, the subcategories are not entirely identical. 30% 20% 10% 0% Home investment Consumption Savings/ investments/ repaym. other debt Comp. for change in financial circumstances Figure 3: Homeowners who refinanced loans and received proceeds spent them this way: HOW DO BORROWERS USE REFINANCING PROCEEDS? Many borrowers consider raising supplementary loans when refinancing their mortgage loans, as the fees and other costs of refinancing widely cover the upfront costs of raising supplementary loans. 60% 50% 40% 43,000 borrowers raised supplementary loans when refinancing their existing loan in This corresponds to 2.7% of all borrowers. The average proceeds were DKK 175,000, equal to aggregate supplementary loans of DKK 7.5bn. 30% 20% 10% 0% Home investment Consumption Savings/ investments/ repaym. other debt Comp. for change in financial circumstances Figure 4: Homeowners who only raised supplementary loans spent the cash proceeds this way: The research company asked these borrowers how they had spent or planned to spend the disbursed cash amount. 37% respond that they have used or plan to use the cash amount to bolster savings. This is a larger share than in the 2008 survey where 20% of the borrowers who had raised supplementary loans in connection with refinancing responded that they intended to use the proceeds to increase their savings. However, the share of borrowers who plan to spend the cash proceeds on home improvement is far smaller than in previous years. 30% respond that they have spent or plan to spend at least part of the money on home investment. In 2008, the corresponding share was 55%. 6 60% 50% 40% 30% 20% 10% 0% Home investment Consumption Savings/ investments/ repaym. other debt Comp. for change in financial circumstances One reason for this change may be that 2009 was characterised by economic uncertainty. Many borrowers may have decided to postpone major home investment. Instead, they used the cash proceeds to increase their savings. 15% use the proceeds to compensate for changes in their personal financial circumstances. Such changes could be more children, commencement of education or payment of advancements. 13% of the respondents have increased consumption or plan to. In % of the respondents intended to use the proceeds to compensate for changes in their financial circumstances, while 21% intended to increase consumption. This also indicates that borrowers have become more cautious than the year before.

7 Figure 5: Homeowners who refinanced loans or raised supplementary loans opted for: Fixed-rate loans issued by mortgage banks Fixed-rate loans issued by mortgage banks, IO ARMs issued by mortgage banks ARMs issued by mortgage banks, IO ARMs, capped ARMs, capped, IO Housing loans issued by commercial banks (secured bank loans) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% HOW DO BORROWERS USE PROCEEDS FROM SUPPLEMENTARY LOANS? 50,500 borrowers raised only supplementary loans in The average proceeds were DKK 600,000. No mortgage loans were refinanced in that connection. The aggregate proceeds from supplementary loans were DKK 30bn. These borrowers were asked: On what have you chiefly spent or how do you plan to chiefly spend the cash amount received?. The majority of borrowers only raising supplementary loans spend the cash proceeds on home improvement. 62% respond that they have spent or plan to spend the money on home investment. 16% spend or plan to spend the loan proceeds on savings, while the response of 14% was consumption. Table 3: Average reduction in debt outstanding after refinancing Under DKK 10,000 3% DKK 10,000-49,999 11% DKK 50,000-99,999 12% DKK 100, ,999 14% DKK 150, ,999 5% DKK 200, ,999 7% DKK 300, ,999 5% Over DKK 499,999 2% Do not know 30% Decline responding 11% THE DEBT OUTSTANDING OF 25,000 HOMEOW- NERS WAS REDUCED About 141,000 borrowers refinanced their mortgage loan in For most of them, the result was lower loan payments, but not for all. Instead, their debt outstanding was reduced. Around 22% of the borrowers who refinanced their loan respond that their debt outstanding has been reduced. This corresponds to about 25,000 borrowers. The typical reduction is in the range DKK 100, ,000. The debt outstanding was reduced by refinancing from fixed-rate 4% or 5% loans into ARMs or fixed-rate loans with higher interest rates. This was possible because longterm rates hovered around 7% early in the year. Refinancing from capped floating-rate loans into ARMs also contributed. SATISFACTION WITH ADVISORY SERVICES RECEIVED On balance, borrowers are satisfied with the advisory services received in connection with borrowing. 80% of the respondents say they are generally very satisfied or satisfied with the advisory services received. The satisfaction levels largely correspond to those of previous years. However, in the 2009 survey 10% of the respondents said they were dissatisfied or very dissatisfied with the advisory services, which is slightly more than in the 2008 survey. Borrowers satisfaction with advisory services received is almost the same whether the services were provided by a mortgage bank or a commercial bank. The relatively high satisfaction level has been prevailing in all the annual surveys which have been conducted since

8 Figure 6: Assessment of advisory services received in connection with borrowing How satisfied were you with the advisory services received in connection with borrowing? (Personal advisory services) Very satisfied Figure 7: Assessment of advisory services in connection with borrowing - distributed between mortgage and commercial banks How satisfied were you all in all with the advisory services received in connection with borrowing? Mortgage banks 2009 Commercial banks 2009 Very satisfied Satisfied Satisfied Neither/nor Neither/nor Dissatisfied Dissatisfied Very dissatisfied 0% 10% 20% 30% 40% 50% Very dissatisfied 0% 10% 20% 30% 40% 50% INTEREST-ONLY LOANS About 30% of the borrowers who refinanced loans or raised supplementary loans in 2009 opted for an interestonly (IO) period. This corresponds to the 2008 level. Borrowers who had raised IO loans were asked: On what have you chiefly spent or how do you plan to chiefly spend the higher discretionary income during the IO period?. 37% say that they intend to use the higher discretionary income to reduce other debt or increase other savings. This could be contributions to pension schemes, the financing of loan payments in respect of other dwellings, acquisition of business, or equity or bond investments. 15% plan to spend the higher discretionary income during the IO period on home improvement or extensions. 14% indicate that the increase will serve to compensate for an income reduction. 12% intend to use or have used the more money at hand to increase consumption, for instance to finance the purchase of cars, boats, holidays, etc. RISK AND ADVISORY SERVICES RELATING TO IO LOANS 62% of the respondents believe that IO loans involve a risk, while 30% do not believe this to be the case. 8% are in doubt. Borrowers who believe that IO loans involve risk mention the risk of declining property prices (31%) and the fact that loan payments may become a heavy burden when the IO period expires (29%). This indicates a change of sentiment compared with the surveys of previous years. Figure 8: Top-5 of the use of higher income during an IO period in 2009 Reduction of other debt Home improvement/ decoration/ extension Compensation for income reduction Increased consumption Other savings 2009 Figure 9: Risk of IO loans 0% 5% 10% 15% 20% 25% 30% IO loans are said to be risky. Do you believe they are risky? Yes No Do not know 0% 20% 40% 60% 80% 8 In the 2008 survey, far fewer respondents pointed to the

9 Figure 10: Risks of IO loans (what are the risks?) Bad idea - problems are postponed Rising interest rates More debt/larger loans The future is uncertain Declining house/property prices Your consumption will rise Loan payments an excessive burden when IO period expires Savings/homeowner's equity will be spent Vulnerable to political intervention Uncertain if you lose your job Housing debt is not reduced Other/Do not know 0% 5% 10% 15% 20% 25% 30% 35% Figure 11: Assessment of advisory services received in relation to IO loans How well were you informed about the aspects to be considered in relation to IO loans? Figure 12: Assessment of advisory services received in relation to ARMs How well were you informed about the risk of ARMs? Very well informed Very well informed Well informed Well informed Poorly informed Poorly informed Not informed Not informed Do not know Do not know 0% 10% 20% 30% 40% 50% 60% 0% 10% 20% 30% 40% 50% 60% 70% 9 risk of declining property prices and higher loan payments after expiry of the IO period as the main risks relating to IO loans. Other risks deriving from IO loans are also mentioned, for instance the risk of postponing problems (28%) and the risk of interest rate increases (27%), which impact IO loans much more than repayment loans. Other risks mentioned include the general uncertainty about the future (18%) and the fact that the housing debt is not reduced (19%). The responses indicate that borrowers are aware that careful consideration is needed before opting for an IO mortgage loan. Borrowers are also generally satisfied with the advisory services received when considering an IO loan. 81% find that they were informed well or very well by their mortgage bank on the relevant aspects to be considered in connection with the choice of an IO loan. Borrowers therefore feel they are kept abreast of the opportunities offered by IO loans, but also of the risk involved if the use of the IO option is not considered carefully. ARMs were the most popular mortgage loans in % of the responding borrowers who raised supplementary loans in connection with refinancing find that they were informed either well or very well on interest rate risk.

10 Figure 13: How do borrowers keep abreast of refinancing opportunities? How do you keep informed of any attractive refinancing opportunities? Figure 15: Transparency of mortgage loans Do you understand the main advantages and disadvantages of the different mortgage loans? Media news on interest rate trends and mortgage banking Yes My bank is instructed to notify me of any opportunities I should consider Yes, but it is difficult I read price lists Yes, if supplemented by advisory services Through my commercial bank No Through my mortgage bank 0% 5% 10% 15% 20% 25% 30% 35% Do not know 0% 10% 20% 30% 40% 50% Figure 14: Seeking loan information on the Internet How did you use the Internet to seek loan information? Media news on interest rate trends and mortgage banking My bank is instructed to notify me of any opportunities I should consider I read price lists Through my commercial bank Through my mortgage bank 0% 5% 10% 15% 20% 25% 30% 35% INFORMATION SOURCES AND CHANNELS Borrowers main source of information is the media s reporting of news on interest rate trends and mortgage banking (23%). This has been the case in recent years, even though the proportion is slightly lower than in 2008 when the financial sector was subject to an exceptional level of coverage due to the financial crisis. On their websites, mortgage banks offer modules enabling borrowers to calculate the impact of different loan options. The calculation modules have gained popularity over the past few years. In the 2009 survey, 82% of the borrowers who refinanced their mortgage loans or raised supplementary loans during the year have used online calculation modules. Some of the borrowers also used the online modules to request loan offers (14%) or order refinancing of their loans (9%). One in five borrowers has sought information and invited offers from other lenders than the bank they ended up using. One in ten changed mortgage banks when refinancing. MORTGAGE LOANS ARE TRANSPARENT 84% of borrowers find that they understand the main advantages and disadvantages of the different mortgage loans. In other words, if investing the necessary time, they are able to find the best solution for their personal financial needs. Many borrowers find that it is doable, but difficult (13%) and that it may be necessary to supplement their own knowledge with advisory services (29%). The number of respondents considering it a difficult exercise that requires supplementary advisory services is slightly higher than in % of borrowers do not find it possible to understand the main advantages and disadvantages of the different mortgage loans on their own. This is slightly fewer than in 2008 (19%). 10 Many borrowers have instructed their mortgage or commercial bank to monitor interest rate trends and notify them if financially attractive refinancing opportunities should arise (7%). Some even read the newspaper price lists on a regular basis (7%).

11 Figure 16: Competition between mortgage loans and secured bank loans Did you consider whether it might be more advantageous to choose a secured bank loan rather than refinancing your mortgage loan and/ or raising a supplementary mortgage loan? ASSESSMENT OF SECURED BANK LOANS Half the respondents considered whether it might be more advantageous to opt for a secured bank loan rather than refinancing their mortgage loan and/or raise a supplementary mortgage loan. The high number of borrowers who also check alternatives to mortgage finance illustrates the keen competition in the housing finance market. Yes No The respondent borrowers eventually opted for mortgage loans. The main reason was that mortgage loan rates were lower (35%). Other reasons mentioned include the preference for fixed-rate loans (secured bank loans are floatingrate loans) and the fact that secured bank loans offer no special advantages compared with mortgage loans. Do not know/ do not remember 0% 10% 20% 30% 40% 50% 60% Figure 17: Reasons for choosing mortgage loans over secured bank loans 11 Mortgage loans are cheapest Will not pay for the financial flexibility offered by a secured bank loan Need the disbursement of high loan proceeds, not a revolving credit facility Advisory services offered by the mortgage bank Advisory services offered by the commercial bank Did not consider a secured bank loan as an alternative Prefer fixed-rate loan Want active debt management with the possibility to refinance Prepayment terms are more transparent Secured bank loans offer no advantages/prefer mortgage loans Advisory services in general A secured bank loan was not possible/offered Habit/Most suitable/easiest Separation/diversification of products/lenders Also chose a secured bank loan/already have a secured bank loan Bringing together products/lender Other Do not know 0% 5% 10% 15% 20% 25% 30% 35%

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