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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

#141

Post by nabdab »

kgwgk wrote: post #89
nabdab wrote: post #76

Earlier quoted context omitted.

People keep missing the rate. The effective annual rate of the loan is 2% because you don’t get the full amount payed out/ the principle is higher than the loaned amount. This is effectively saying that someone is willing to loan you 1mil, and pay you negative interest on a loan of 1.1mil as long as you pay a fixed payback per month. So end of line you still payed more than you got, but every month instead of paying…

> investors still get more money back than they invest No, they don’t. That’s the point. The reference rate is negative because the investors are buying bonds which will lose money.

They are buying at a conversion rate. So they buy for instance a 100k bond for 95k, since the the time is fixed and payments are forced, you end up guaranteed a 2.1% net interest even though the running interest on the principle from month to month is fixed.

Re: Danish bank launches negative interest rate mortgage

#142

Post by lilsoso »

pontifk8r wrote: post #40

It seems like a (cynical?) way to turn today's overpriced real estate assets into a stream of payments. Someone purchasing a home for DKK 300K with no interest may think they're getting a deal, until they try to resell that home and find out they cannot sell it for more than DKK 240K.

You seem to feel that housing is overvalued in Denmark in general, by your comment: "Someone purchasing a home for DKK 300K with no interest may think they're getting a deal".

I imagine that housing in Copenhagen is similar to Amsterdam, and has been appreciating quickly.

From an international perspective, I think it can be argued that these locations are still undervalued. They're still somewhat affordable to local tech workers, whereas in locations like SF, NYC, LA, Toronto, London, etc.. they're not. And from the perspective of Americans, or say people in Hong Kong, these properties are remarkably cheap due to your socialized economies.

I'm still surprised that foreigners haven't purchased all of the real estate in the city centers of Denmark and the Netherlands.

Re: Danish bank launches negative interest rate mortgage

#143

Post by kgwgk »

nabdab wrote: post #141
kgwgk wrote: post #89

Earlier quoted context omitted.

> investors still get more money back than they invest No, they don’t. That’s the point. The reference rate is negative because the investors are buying bonds which will lose money.

They are buying at a conversion rate. So they buy for instance a 100k bond for 95k, since the the time is fixed and payments are forced, you end up guaranteed a 2.1% net interest even though the running interest on the principle from month to month is fixed.

It seems clear that the bond holders will not be getting any positive coupon and they are guaranteed to lose money. That's why this is in the news and we're talking about it.

As far as I understand the issuer cannot just sell the the bonds at 105% or whatever to account for the loss upfront with the price converging to 100% in 10 years (because these are callable bonds) and apparently they have some technical problems to implement negative coupons: "The negative callable bond is creating some technical difficulties. Jyske said it will initially be registered as a floating-rate bond until the systems of VP Securities, Denmark’s central securities depository, are adapted to handle negative coupons for fixed-rate bonds."

https://www.bloomberg.com/news/articles/2019-08-05/first-10-...

In case you think negative yields cannot happen, it is definitely possible. Many government and corporate bonds in Europe are trading at a price which is above the value of the nominal plus all the remaining coupons.

Germany has issued last month zero-coupon bonds which were sold above par and they are trading now at 106.87 euros (and the only thing you will get back if you hold them to maturity is 100 euros in 2029).

https://www.deutsche-finanzagentur.de/en/fact-sheet/sheet-de...

Re: Danish bank launches negative interest rate mortgage

#144

Post by kgwgk »

kgwgk wrote: post #143
nabdab wrote: post #141

Earlier quoted context omitted.

They are buying at a conversion rate. So they buy for instance a 100k bond for 95k, since the the time is fixed and payments are forced, you end up guaranteed a 2.1% net interest even though the running interest on the principle from month to month is fixed.

It seems clear that the bond holders will not be getting any positive coupon and they are guaranteed to lose money. That's why this is in the news and we're talking about it. As far as I understand the issuer cannot just sell the the bonds at 105% or whatever to account for the loss upfront with the price converging to 100% in 10 years (because these are callable bonds) and apparently they have some technical problem…

> they are guaranteed to lose money

To be fair, I imagine it could still happen that these bonds have zero or positive yield if they are bought at more than a 5% discount, but in that case why would the issuer bother offering negative coupons in the first place?

Re: Danish bank launches negative interest rate mortgage

#145

Post by spaceflunky »

Traster wrote: post #122
spaceflunky wrote: post #105

Earlier quoted context omitted.

What am I missing here? why are they doing this? There has to be some other gain somewhere else.

It's fixed for 10 years. So yes, it's underperforming right now, but the fact that the yield curve has inverted gives them good reason to believe that there's going to be a recession in the next 10 years, so actually this is a relatively good return compared to losing money in the stock market or losing even more by buying the 10 year govenrment bond which right now is paying -0.58%.

why can't they just sit on the money? Wouldn't that perform better?

Re: Danish bank launches negative interest rate mortgage

#146

Post by useerup »

bawana wrote: post #108

Why doesn’t the danish govt just print more money? Although part of the eu, they opt out of the monetary policy and still use the kroner. OTOH, how much of the eu debt does Denmark own— and vice versa. If they affect the kroner-euro exchange rate then they could lose money if it moves the wrong way.

This situation (negative interest rate) occurs because there is a capital surplus.

This happens because investors a wary of putting too much of their capital in stocks. Nobody knows what Trumps trade wars will lead to, so that's a significant risk factor for stocks.

Consequently, investors look for other places to put their money until the uncertainties gets cleared up. Preferably somewhere safe - meaning not necessarily in a bank as banks can fold. Danish real-estate bonds fits that: The Danish real-estate market is generally considered sound.

Furthermore, Denmark has a declared policy of closely following the Euro. The DKK has to be within a narrow band of 2.25% (IRRC) of the Euro. Having followed this policy ever since the EMS disbanded, investors generally trust this commitment.

Which means that until Trump cleans up the disturbance he has created, investors will flee stocks and look for safe bonds, to the extent that lenders/investors will actually pay for safe investments.

While attractive for lenders, it is a sign that something is very wrong with the economy. In a healthy climate money would flow to the stock market.

Re: Danish bank launches negative interest rate mortgage

#147

Post by useerup »

ptah wrote: post #12

this is pretty awesome. hopefully it spreads across europe

It is actually a sign that something is very wrong with the general economy.

Negative rates only happens when investors shy away from stocks and just want their money to be safe for the next 5-10 years. Investors are actually willing to pay just to have their money kept safely out of the stock market. What does that tell you?

There is so much volatility (read: Trump). Stocks can both go up and down with a tweet. Until the next day or 4 hours later. So investors flees stocks and look for safe bonds.

Re: Danish bank launches negative interest rate mortgage

#148

Post by apta »

sleepysysadmin wrote: post #11

Not the world's first at all. https://tradingeconomics.com/switzerland/interest-rate Switzerland has been negative for years. Negative interest rates mean only 1 thing. The central bank is 100% confident that they are on the brink of deflationary spiral; much like Greece or Japan. This is all connected: https://news.ycombinator.com/item?id=20615403 https://news.ycombinator.com/item?id=20654624 https://tradingeconomic…

> The central bank is 100% confident that they are on the brink of deflationary spiral; much like Greece or Japan.

Is this a good thing for people who hold cash assets? Meaning, would you be able to buy say a $40,000 car for $20,000 in case this happens?

Re: Danish bank launches negative interest rate mortgage

#149

Post by useerup »

buboard wrote: post #50
martin_bech wrote: post #37

Earlier quoted context omitted.

It actually is.. any morgage below infation, is free money..

You really think a for-profit bank would give more than it takes?

The bank takes it's share in the form of fees. The negative rate is simply because the money market sees negative rates on the 5-10 year horizon. The bank simply passes the rate of the money market on to the consumer:

> Høegh said Jyske Bank is able to go into money markets and borrow from institutional investors at a negative rate, and is simply passing this on to its customers.

Negative bond rates happen when there is a surplus of capital looking for "safe havens". Some investors are willing to pay to have money placed safely for a number of years. The Danish real-estate bonds are regarded as a very safe haven.

Re: Danish bank launches negative interest rate mortgage

#150

Post by chvid »

msh wrote: post #38
chvid wrote: post #16

Earlier quoted context omitted.

For poor people it means that your rent continues to rise, house prices become further inflated and you will still pay massive interest rates if you get a consumer loan.

In Denmark the rents are not free market so they can't just rise with house prices.

There is no rent control for buildings built after 1993.
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