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Danish bank launches negative interest rate mortgage

theguardian.com

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Re: Danish bank launches negative interest rate mortgage

#21

Post by jjazwiecki »

Just listened to this Bloomberg podcast, where they interviewed Viktor Shvets on the meaning/implications/future of negative interest rates: https://www.bloomberg.com/news/audio/2019-08-09/what-negativ...

> He argues that undermining the ’time value’ of money–or the principle that money available now is worth more than money in the future because you can use it to earn additional money–won’t lead to economic growth. In fact, he says, negative rates are going to end up leading to a rethink of modern capitalism and political society once people realize they have big consequences.

Re: Danish bank launches negative interest rate mortgage

#22

Post by nabdab »

0x0 wrote: post #8

The effective interest seems to be above 0% though. The linked FAQ shows calculations where the total amount paid back is more than the total loan amount. Plus some talk about some kind of exchange rate(?) seems like this could be even riskier than normal?

The “Exchange rate” is the kurs(Danish) when the loan is for instance at kurs95 that means you only get 95% of the loaned amount. Effectively the investor gets a bigger principal than was actually loaned. Depending on invester pressure the kurs goes up, but It’s typically close at 100, and a lower rate loan is then opened up, since investing in a kurs100+ loan means taking an emidiate hit on the principal owed, which is bad for investors even if interests pay back the gap over time.

And true, even with negative rate this loans kurs plus fixed costs still mean you are still paying the bank more than they are loaning you.

Re: Danish bank launches negative interest rate mortgage

#23

Post by nabdab »

devoply wrote: post #20

We need to see more of this so we can transfer wealth from the rich to the poor more effectively and get them to invest in the economy.

More money is loaned to the rich than is to the poor. So this is giving more money to the rich than it does to the poor.

Re: Danish bank launches negative interest rate mortgage

#24

Post by zajio1am »

collyw wrote: post #9
apo wrote: post #4

This is all the more surprising given that inflation in Denmark is running ~1%/year. That means the bank is absorbing a real loss of 1.5%/year on the deal. Meanwhile, the housing market is roaring: https://tradingeconomics.com/denmark/housing-index It would be one thing to see negative rates in a declining property market and/or in a deflationary environment. However, negative rate mortgages are happening in what loo…

>That means the bank is absorbing a real loss of 1.5%/year on the deal. (As I understand it) the Eurobor rate is negative (the rate that the central bank lends to the other banks), so its unlikely that the bank are taking the hit directly.

Euribor is not a rate that central bank lends to other banks, it is a rate commercial banks lend between themselves.

ECB has its own rates (e.g. deposit facility, marginal lending facility for overnight deposits and loans).

Re: Danish bank launches negative interest rate mortgage

#25

Post by davidw »

UnFleshedOne wrote: post #14
aszantu wrote: post #2

what does that mean for poor people, does someone know? Can someone explain?

Poor people are screwed up regardless -- if rates are high, they can't afford payments, if rates are low, prices rise and they still can't afford payments. Not to mention getting downpayment. Workaround: don't be poor.

Do rising prices spur the construction of more homes in Denmark?

Re: Danish bank launches negative interest rate mortgage

#26

Post by benj111 »

devoply wrote: post #20

We need to see more of this so we can transfer wealth from the rich to the poor more effectively and get them to invest in the economy.

Is that necessarily the case?

I as a home owner would be interested for a remortgage to stick in the stock market (or even a risk free investment). Not really a poor person option though.

This would presumably just inflate the/a housing bubble, which doesn't seem like it would inherently help poor people, you cant really liquidate the asset as you need to live in it. Second homes on the other hand....

Re: Danish bank launches negative interest rate mortgage

#28

Post by martin_bech »

apo wrote: post #4

This is all the more surprising given that inflation in Denmark is running ~1%/year. That means the bank is absorbing a real loss of 1.5%/year on the deal. Meanwhile, the housing market is roaring: https://tradingeconomics.com/denmark/housing-index It would be one thing to see negative rates in a declining property market and/or in a deflationary environment. However, negative rate mortgages are happening in what loo…

All Danish “realkredit” morgages are done with bonds, so the “bank” is not loosing money, the buyer of the bond is.

For some loans, on some conditions, the morgage is actually negative, and lender is either paid a quartely price, or the debt is lowered accordingly. (This is for the morgage named F5, with a fixed 5year rate, and when the house has very low debt, then the fee charged, is also lower, as it is based on risk)

Re: Danish bank launches negative interest rate mortgage

#29

Post by olau »

apo wrote: post #4

This is all the more surprising given that inflation in Denmark is running ~1%/year. That means the bank is absorbing a real loss of 1.5%/year on the deal. Meanwhile, the housing market is roaring: https://tradingeconomics.com/denmark/housing-index It would be one thing to see negative rates in a declining property market and/or in a deflationary environment. However, negative rate mortgages are happening in what loo…

Some background: In Denmark, mortgages for housing are handled by special real-estate lenders (realkreditinstitutter) who issue bonds and handles defaults.

These bonds are considered to be very stable, about the same quality as state bonds, as the lenders will only lend up to 80% of the value of the house (an ordinary bank loan must be used for the remaining fraction) so can usually recover most of the money through a forced sale. Also there's a fee on top of the bond rate to absorb the losses as far as I understand. The fee depends on the security percentage, so if the lender only has a security in the top 60-80% part of the value of the house, the fee is much higher, see the tables here:

https://www.mybanker.dk/sammenlign/bolig/bidragssatser/

The Danish central bank has had negative interest rates for some time, and these real-estate bond rates have also been falling.

When taking out a mortgage, you can either opt for a fixed rate for up to 30 years, or variable-rate bonds where the interest is redetermined periodically, e.g. once a year. The variable-rate bonds have been negative for some years now. The news here is that the rates have been falling even more lately, and that you can now get the negative rate fixed for up to ten years.

In any case, it's the bond investors who are losing money, not the real-estate lenders who apply a fee on top, both as a rate and a fixed fee when applying for the loan.

The rates are so low that I think that if you're in the low-risk category, you might end up with a small negative total rate. Of course, the fixed fees when obtaining the loan may eat that.

Re: Danish bank launches negative interest rate mortgage

#30

Post by azinman2 »

jonplackett wrote: post #27

Can someone explain simply how they make money doing this? Or how the institutional investors they mention make money?

They borrow the money on money markets from people who will lose even more, and you get some of the upside as well.
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