Stockholm (Ekonamik) – When Jyske Realkredit launched its fixed-rate mortgage with a nominal interest rate of -0.5% and a maturity of up to 10 years in August – the first such mortgage in the world, it caused a splash on the domestic housing market in Denmark – and some alarm as to the state of the global economy abroad.
Incredible as it may sound, the negative interest rate doesn’t, however, mean that clients are going to earn money directly from borrowing. Borrowers will pay back a little less than the amount borrowed over a decade, and there are other one-time fees and contributions to be paid. Losses can also be incurred based on interest rates. “In practical terms, the experience will be that the mortgage loan repayment will be greater at first than it would have been with a positive interest rate,” explains Jyske real estate economist Mikkel Høegh. “The negative interest rate will act as a kind of subsidy to the repayment, meaning the repayment amount becomes smaller and smaller as the debt is reduced.”
But how is this actually possible? “We made calculations at the extremes and it’s fully possible to have a negative bond rate,” Mr Høegh tells Ekonamik. “In Denmark, we have [to] pass through and match funding in the Danish mortgage system. Therefore, what we do is that we issue a bond, and the interest rate on that bond is the same for the investor as it is for the loaner. The Danish mortgage bond is considered to be very secure, so investors accept to pay the -0,5% in interest.”
It appears that Jyske, Denmark’s third largest bank, is now being emulated by others, such as Nordea, indicating a consensus both about the Danish housing market and the global economy, the negative mortgage being a consequence of the negative interest rate loans being made by financial markets. “Because of the mortgage system, there is quite a consensus about the interest rate in Denmark,” Mr Høegh explains. “We can do it because of the effective system and because we use the market to dictate the interest rate level. Therefore, homeowners get their rate from the market.”
Due to the maturity, the loan is obviously an additional loan on top of the original one. Because of the cost of borrowing, the loan must above a certain figure – DKK200,000 (almost $30,000) – in order for it to pay off. The borrowers who get a negative interest rate on a 10-year maturity are people who already have value in their property, Mr Høegh says. “Often it is people with a strong private economy because they are amortizing their loan over 10 years. Many other lenders also have negative interest rates, but these are only on 1-year maturities.”
So what is the downside for the saver, who presumably won’t be paid in interests on their deposits, or will face exposure when they these go negative? “The biggest investor behind the loans is the pension funds. This means that loaner gets less interest on their pension savings,” Mr Høegh explains.
Economists say this is an alarming sign for the global economy. The amount of this type of debt on global financial markets, issued as government or corporate bonds, now totals $15 trillion, having doubled since December amid a slowing economy and Donald Trump’s trade war(s). “The low interest rates in Europe are because of nervous investors and a lot of savings,” Mr Høegh acknowledges. “I don’t think this is a special problem for Denmark; the low rates is a problem for Europe. In Denmark we have a fixed currency tied to the euro, which means that the interest is low compared to the strength of the Danish economy.”
“However, we are not seeing a huge increase in property prices at the moment. Right now we see that housing prices are not increasing as much as they were two years ago,” he added.
Image: Mikkel Høegh