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Kerry Lutz's--Financial Survival Network

Sep 19, 2019

Two weeks ago Jyske Bank, Denmark’s third-largest bank, shocked the world by offering mortgages with a negative interest rate. Put simply, the bank would effectively pay customers to borrow money. It’s a bit more complicated than that, however, as borrowers have to pay fees that offset the savings.

The news got loads of attention, as people struggled to wrap their heads around being paid for something they are supposed to be purchasing. Consumers around the world wanted in on the action.

The weekend following the negative mortgages announcement, Jyske Bank received 80-90 inquiries from Americans who wanted these viral mortgages.

It’s all been rather amusing for Jyske Bank and its housing economist Mikkel Høegh, who has had to deal with all the attention.

“What I have said to the Americans is that they have to have a Danish property to get such a loan,” Høegh told Yahoo Finance in an email. “Some of the Americans then asked if I could help them buying a property in Denmark. I can’t with that but we can help them with the funding if they get the house.”

Jyske Bank has had to do a lot of clarifying; there’s a widespread misconception that the bank is actually paying borrowers to take their money. First of all, the bank is not actually paying anyone; it is simply forgiving part of the loan each time a payment is made. A mortgage borrower is likely to end up paying Jyske back a little more than they borrowed, factoring in fees and charges associated with arranging the mortgage loan.

And the bank can afford to do this without losing money because it borrows at negative interest rates as well.

“The experience has been quite good,” Høegh told Yahoo Finance in an email. “Many people like to hear about the loans and apply for them.” Høegh added that the country was amidst a historic refinancing of mortgages. Mortgage debt in Denmark increased in 88 of 98 municipalities, according to Denmark’s national bank, with most customers choosing fixed rates.

Though only Denmark has done this so far, the German Bundesbank has indicated that these loans would also be “conceivable” and wouldn’t be against them, according to the Stuttgarter Zeitung and Bloomberg.

How it works

Denmark has had low interest rates for a long time, and the country’s banking system has a closer than normal relationship between borrowers and investors, facilitated by banks.

Because interest rates have gone down and the prices of mortgage bonds have gone up for investors, those rates can be passed on to borrowers — creating negative mortgages if they’re low enough.

The fact that banks and investors are willing to invest with negative returns is not necessarily a good thing, because it shows they would rather take a small loss than lose more elsewhere, because they view the economy as less-than-healthy. Though negative interest rates aren’t new in Europe, they are breaking new ground, from these types of mortgages to Germany selling a negative-yielding 30-year bond for the first time in August.

Despite being in “historic remortgaging,” Høegh said the negative interest rates don’t actually make it any easier for home buyers to get a loan, but makes it easier to get a bigger loan – a lower rate means a higher disposable budget.

“People find the new loans very attractive, but I don’t think that it is a big surprise for them,” said Høegh. “The most surprising thing is that de-link between the real estate prices and the interest rate is in these years less significant.”

Jyske Bank's graph showing the amount of new loans over time.
Jyske Bank's graph showing the amount of new loans over time.
In other words, a flurry of borrowing and higher-value loans hasn’t had a big effect on housing prices, even though many of these loans are used to buy property or renovate.

Nordea, another bank in Denmark that began offering zero-interest 30-year loans, hasn’t seen much of a change, on the other hand, perhaps illustrating that despite global coverage, it hasn’t had much of an effect.

“We don’t think that anything has changed,” said Lise Bergmann, housing economist and chief analyst at Nordea. “The investor interest is more or less the same as before the news coverage.”

Looking at a chart regarding new loans provided to Yahoo Finance by Jyske Bank, the answer is probably somewhere in the middle. There has, indeed, been a surge in new loans this summer, but on a 20-plus year chart, it’s not as breathtaking as one might expect from a negative-interest mortgage.