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A Danish bank is offering mortgages with negative interest rates

Scorpio

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A Danish bank is offering mortgages with negative interest rates — why you shouldn’t wish for that to happen in the U.S.



By Jacob Passy

Published: Aug 12, 2019 6:06 p.m. ET

When a mortgage rate is negative, a borrower must still make monthly payments, but they pay back less than what they owe


MarketWatch photo illustration/iStockphoto
U.S. interest rates are highly unlikely to go into the red any time soon — but if they did, it would have a major effect on Americans’ financial lives.
It’s safe to say that mortgage rates have never been lower in Denmark.

In fact, they’re now negative. Denmark’s Jyske Bank JYSKY, -20.24%, is now offering a 10-year fixed-rate mortgage at negative 0.5%. Additionally, Finland-based Nordea Bank announced Wednesday that it will offer a 20-year fixed-rate mortgage in Denmark that charges no interest, and the bank is preparing for the possibility of home loans up to 30 years in duration having negative rates. Currently, the rates on 30-year fixed mortgages average just 0.5% in Denmark.

When a mortgage rate is negative, a borrower still must make monthly payments toward their principal, but they ultimately pay back less than they originally borrowed. They would, of course, still have to pay other costs and fees.

Lenders would likely restrict access to the most creditworthy borrowers, excluding those with poorer credit scores.
At the same time, other long-term rates now stand at or below 0% across the world. Thirty-year German bond yields TMBMKDE-10Y, -3.01% have dropped deep into negative territory, and central banks in Europe and Japan have toyed with 0% or negative rates for years now.


In the U.S., the situation is much different. Right now, the 30-year fixed-rate mortgage in the U.S. averages 3.6%. Nevertheless, the specter of a recession has some worrying about the trajectory of the interest rates in the U.S. and what negative rates could mean for Americans.


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What would happen if interest rates turned negative in the U.S.

It would become harder — or, at least, expensive — to save money. Banks would be charging negative rates on deposits, meaning that consumers would be paying the bank for opportunity to squirrel away money.


Bank customers could turn to more risky methods of stashing money, Hale said, such as holding onto actual cash or putting it into riskier investments. This could also have ripple effects across people’s financial lives. “This might put some pressure on home buyers to shorten their home searches, to avoid having down-payment money eroded by negative rates,” Hale said. “It could also make it more difficult to save up for a down payment.”


Faced with greater risk, banks could become more selective in whom they will give a mortgage to.
In Denmark, the ultra-low interest rate environment has in turn caused home prices to increase as borrowers could afford pricier homes. “Prices in the bigger cities Copenhagen and Århus have been boosted,” said Helge J. Pedersen, group chief economist at Nordea. The Danish Financial Supervisory Authority has consequently taken measures to counter this effect and prevent a housing bubble from forming, Pedersen said.


A boom in refinances would also likely occur, as has happened in the U.S. every time mortgage rates have dropped to record lows, Fratantoni said.


But while a negative-rate mortgage offers a major opportunity for savings, borrowers could have trouble accessing it. Given the risk this would present to lenders, they may restrict access to only the most creditworthy borrowers, excluding those with poorer credit scores. Sources of liquidity could also dry up for lenders, meaning they’d have less money to offer borrowers.

Why Americans likely won’t see negative interest rates — at least any time soon

Economic experts polled by MarketWatch overwhelmingly agreed that negative rates were unlikely.


“It would take a lot of big changes for the U.S. to have negative interest rates,” said Kate Warne, investment strategist and principal at Edward Jones.


While inflation is falling short of the Federal Reserve’s target, it is still in the ballpark of 2%. Moreover, the U.S. economy is expanding, making negative rates all the more unlikely.


Places like Europe and Japan have another economic hurdle that’s made negative rates possible: Their populations are aging, which means their labor force is shrinking.


‘I don’t expect any negative in rates in the US any time soon, but even if or when we do...it will probably take a few years before we see the possibility of negative mortgage rates.’ —Danielle Hale, chief economist at Realtor.com
“That’s an enormous headwind on economic growth,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association, a trade group that represents the home-loan industry. “That keeps interest rates extraordinarily low.”


The Federal Reserve did opt to cut short-term rates last week, but yields on U.S. Treasuries and U.S. bonds nevertheless remain much higher in the U.S. versus those overseas. The yield on 10-year Treasury note TMUBMUSD10Y, +0.16% currently stands around 1.7%, making up for a lot of ground that would need to be lost before it reached 0%, let alone negative territory.


And even then, Americans wouldn’t feel the full effect, not at first. Denmark’s central bank lowered its policy rate to 0% in mid-2012. While certificates of deposit began carrying negative yields shortly thereafter, it’s taken around 7 years for those rates to crop up in the mortgage market, said Danielle Hale, chief economist at Realtor.com.


“I don’t expect any negative in rates in the U.S. any time soon, but even if or when we do see them pop up in the Fed funds rate or other bank rates, it will probably take a few years before we see the possibility of negative mortgage rates,” Hale said.


(Realtor.com is operated by News Corp NWSA, +2.41% subsidiary Move Inc., and MarketWatch is a unit of Dow Jones, which is also a subsidiary of News Corp.)


Policymakers in the U.S. are unlikely to allow rates to go negative. The experiment with negative rates has not produced the expected results in other countries, Warne said, largely due to the adverse effect they’ve had on consumer confidence.


“They’ve had a dampening effect on economic growth,” Warne said. “You worry more about what negative interest rates mean for the economy and your future rather than focusing on the very good deal on the mortgage.”



https://www.marketwatch.com/story/a...happen-in-the-us-2019-08-12?mod=hp_realestate
 

JayDubya

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I'm sure the likes of Wells Fargo, JP Morgan Chase, Quicken Loans, B of A, and others are keeping a close eye on this.
Considering it a trial balloon and eagerly anticipating the results.
 

Pyramid

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My simple brain has a number of comments/questions, some of which may actually be intelligent/valid:

--Banksters are not in the business of losing money, so what does the fine print say?
--Are the bankster fees and refinance costs offsetting the negative rates?
--Really low/negative mortgage rates would cause housing prices to skyrocket in a very tight European market where new houses are really not being built. Not much buildable land to do so, due to conservation of farmland and historical sites, environmental regulation, political climate etc..
--Perhaps the banksters are in cahoots with the real estate companies or are the same entities. Moving cash from left pocket to right pocket?
--Are the negative mortgage rates offsetting negative savings rates where banksters are profiting from people with actual savings that are losing money every day parked in cash, .gov bonds and other low-yield "safe havens"?
 

Thecrensh

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My simple brain has a number of comments/questions, some of which may actually be intelligent/valid:

--Banksters are not in the business of losing money, so what does the fine print say?
--Are the bankster fees and refinance costs offsetting the negative rates?
--Really low/negative mortgage rates would cause housing prices to skyrocket in a very tight European market where new houses are really not being built. Not much buildable land to do so, due to conservation of farmland and historical sites, environmental regulation, political climate etc..
--Perhaps the banksters are in cahoots with the real estate companies or are the same entities. Moving cash from left pocket to right pocket?
--Are the negative mortgage rates offsetting negative savings rates where banksters are profiting from people with actual savings that are losing money every day parked in cash, .gov bonds and other low-yield "safe havens"?
If the smaller banks are being charged -2% to keep their money in government securities/bonds, then a -1% APR mortgage may actually make sense.
 

Scorpio

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crensh,

not sure how it works, but the dough to finance a mort is 'created' at the time of signing
the days of banks lending depositor money only are long gone

through rehypothecation, they have lent that out and many times those amounts

when you look at it, it is .gov forcing dough into the system,
with a neg rate, you would think it is a form of forced injection to the slaves

the banks aren't going to lose less IMO,
this is .gov trying to force inflation into the system

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What Is Rehypothecation?

Rehypothecation is the practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients. Clients who permit rehypothecation of their collateral may be compensated either through a lower cost of borrowing or a rebate on fees. In a typical example of rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades.
 
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D-FENZ

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Been saying for years that borrowing money at or near inflation levels is a no-brainer- especially if the interest is tax deductable. Not only that, it's a grand slam if the currency borrowed (dollar) goes south like most here anticipate. Get boos and hisses here every time. But it's the savers that have been losing- for years.

Can't imagine the excuses folks will have when the actual rates go to zero or below. Even Dave Ramsey might have to get himself a new schtick. Debt-free might feel good but until the rules change it's just mental accounting.
 

D-FENZ

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Another article I read this morning on this stated that the price of housing in Denmark is starting to climb drastically negating the effects of the negative rate
... unless of course you have borrowed cheap money. The losers are the ones who are trying to save for it.

Thanks for making my point.
 

Strawboss

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Negative rates are deflationary as they destroy money.

People flee the monetary system to avoid this tax on their money by buying tangible assets...causing inflation.

Confusing, eh?
 

Rusty Shackelford

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even if you borrow cheap money (ie negative rates) to buy a house for $150K that cost $110K prior to the negative rate fiasco, then you are getting screwed too.
 

Hystckndle

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crensh,

not sure how it works, but the dough to finance a mort is 'created' at the time of signing
the days of banks lending depositor money only are long gone

through rehypothecation, they have lent that out and many times those amounts

when you look at it, it is .gov forcing dough into the system,
with a neg rate, you would think it is a form of forced injection to the slaves

the banks aren't going to lose less IMO,
this is .gov trying to force inflation into the system

----------

What Is Rehypothecation?

Rehypothecation is the practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients. Clients who permit rehypothecation of their collateral may be compensated either through a lower cost of borrowing or a rebate on fees. In a typical example of rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades.

Good stuff !
Funny about all of this.
And not funny at the same time.
The bank lends you nothing
Your signature on the mortgage line creates the debt .
The bank then gets you , at the closing table, to assign all to them and then to insure the entire asset / debt ( asset and a tool for them ) and .gov gets you to pay taxes on the entire thing.
Bank takes the debt ( really they are just facilitators ensuring you pay yourself back....makes my head hurt that does )
and then they use your promise to pay yourself back as collateral to do all the above you posted etc etc.
AND they get to charge you interest on your future hard work and sweat.
Fooking absurd really and when you figure it out...really pisses you off.
( Thank you GIM1 ...lmao ...paraphrasing the above...have copies of threads where we went over it in infinite detail )
Yeah,
totally...they give up a point or two ...how far can it go ?? Pffft to them...need some velocity...
And all the while they are stacking it up multiple times behind you the signer.
Banks are just diff counter fitters licensed by the main counter fitter ...lol.
So yeah...some .gov dudes forcing the system.
Regards Scorp, good stuff this is.
Haystack