Conservative. Always.
Our policy is conservative leveraging for every acquisition – rarely higher, often lower. The target is for the portfolio's total leverage to be significantly reduced no later than 10 years after the client's career cessation. This strict framework is not risk aversion; it is a realistic assessment of what a property portfolio must be able to endure through a severe recession without undue pressure on the client's life situation.
Why low leverage does not mean low returns
A common argument against conservative leverage is that it 'leaves returns on the table'. This argument overlooks that geared returns also constitute geared risk – and that this asymmetry strikes hardest precisely when the client cannot afford to be hit.
For a property acquired with high leverage, a housing market downturn will eradicate the majority of the equity. On the same property, acquired conservatively, the same downturn will only marginally reduce the equity. The difference in downside tolerance is enormous – and it is this that determines whether the client must sell at the worst possible timing or simply wait out the market.
Our model is calibrated so that a significant correction in house prices – as we have witnessed in Denmark twice in 30 years – must not trigger forced sales of any property in any client's portfolio. That boundary determines our leverage policy.
Loan types we utilise
Fixed-rate mortgage
Primary loan type. Typically 30-year maturity. Predictability is more important than optimisation.
Variable interest rate
Applied selectively, only to a minor portion of the total portfolio and exclusively for clients with documented risk tolerance.
Interest-only period
Applied selectively during the establishment phase – never after the client's 33rd birthday.
The disciplined use of interest-only periods
Interest-only periods are the most misunderstood element in Danish mortgage lending. It is not a 'free' loan – it is a deferral of amortisation, which comes at a cost in the form of higher debt when the period expires. However, used judiciously, it can improve cash flow during a critical establishment phase.
We apply interest-only periods selectively during the first 2–4 years after an acquisition, a time when the client typically needs to build up buffers and a capital base. We actively discontinue it as soon as the buffer is in place, and no later than 5 years before the anticipated career cessation. We never use it as a structural cash flow solution – only as a temporary bridge.
This discipline is crucial. We have seen enough portfolios where interest-only status became permanent to know where the pain ultimately lies: with the client, five years too late.
Stress testing as standard practice
Every acquisition is stress-tested in our investment committee against three scenarios: an interest rate increase of 3 percentage points, a 25% fall in property values, and a 6-month loss of rental income. A property that does not pass all three tests simultaneously with a margin does not proceed to signing.
On occasion, this discipline has cost clients specific deals they were prepared to execute. This is the correct price.
"Debt that only functions in good weather is not a tool. It is a risk awaiting its moment."
Read about amortisation and equity
How amortisation itself builds wealth.