A Danish bank is practically paying people to take loans from them as they started offering mortgages at a negative interest rate. Yes, you read that right: a bank is going to pay loaners for borrowing money.
The bank, Jyske Bank, announced this week that they are offering their clients to take out a 10-year fixed-rate mortgage with an interest rate of -0.5%, meaning those who borrowed money from them essentially needs to pay back less than the amount they borrowed. To put things into perspective, if a borrower took out a loan of $1 million and was able to pay the mortgages in the prescribed period of ten years, the borrower will only need to pay $995,000.
However, it should be worth noting that there are other fees involved when borrowing money aside from the interest one has to pay to the bank like taxes and processing fee, so chances are, customers will still be paying more than they owe.
Jyske Bank, the third-largest bank in Denmark, says that this new system is a great opportunity to homeowners and those who are starting a new life.
“It’s another chapter in the history of the mortgage,” the Jyske Bank housing economist Mikkel Høegh told Danish TV. “A few months ago, we would have said that this would not be possible, but we have been surprised time and time again, and this opens up a new opportunity for homeowners.”
The bank’s negative rate is the newest offering of extremely low borrowing interest rates in Denmark designed to encourage citizens to take out loans to finance their housing.
Aside from Jyske Bank, other Danish banks have also offered similar mortgage and interest rates. Nordea Bank, Scandinavia’s biggest lender, also said that they would start offering a 20-year fixed-rate mortgage with 0% interest and other banks are also offering a 30-year term for 0.5% interest. Furthermore, Danish banks have also started implementing negative rates for short-term loans since May, reports reveal.
“It’s never been cheaper to borrow,” Lise Nytoft Bergmann, the chief analyst at Nordea’s home finance unit in Denmark.
Negative rates may sound counterintuitive, but it is a business decision that Danish banks need to do to prevent bigger losses when recession comes ashore.
As the market becomes volatile following the long-standing trade war between two global economic superpowers, USA and China, as well as how signs of a brewing recession may dramatically affect their trade partners, especially Europe, banks need to rethink their policy on the money they lend.
Because of the volatility of the market, banks are implementing negative rates in order to secure their money. Instead of risking a huge amount of loss when borrowers cannot meet their mortgage payments when recession comes, banks are willing to let little loss by offering negative rates so more borrowers can pay up their loans.
“It’s an uncomfortable thought that there are investors who are willing to lend money for 30 years and get just 0.5% in return,” Bergmann said. “It shows how scared investors are of the current situation in the financial markets, and that they expect it to take a very long time before things improve.”
Even economists have not expected that the negative rates would even be possible in real life, but it seems like they need to reevaluate their opinions.
In the past, negative rates are unthinkable, but the policy is slowly turning the other way especially after post-recession economies in Europe and Asia; the United States even said that they would not prohibit the policy if banks think that it is necessary.
It was “absolutely unthinkable when I started writing this book,” Frederic Mishkin, a former Federal Reserve governor and professor at Columbia Business School, said. Mishkin wrote The Economics of Money, Banking and Financial Markets, a macroeconomics reference textbook.
In textbooks like Mishkin’s, a 0% interest rate was known as the “zero lower bound.” But it seems as it does make sense for banks to go lower than now.
“It’s very hard to obviously get depositors to accept negative interest rates for putting their money in there,” said Marc Bushallow, managing director of fixed income at Manning and Napier, which manages $35 billion in assets. But they do it nonetheless.