The Danish bank itself does not understand how it can issue a mortgage at negative interest rates
As reported by BBC, the negative rate is offered to those who take out a mortgage for up to 10 years and is fixed in the contract – meaning that throughout this period the bank has no right to change the loan terms and increase payments. That is, each month the loan balance will decrease by an amount exceeding the monthly payment. Thus, to fully repay the loan, you will need to pay the bank less than you originally borrowed.
The Danish branch of Nordea bank has promised to soon start issuing interest-free mortgages (at 0% per annum) for a term of 20 years, and to conclude 30-year mortgage contracts at a fixed rate of 0.5%.
Understanding that for the average person the offer to return less money to the bank than they originally borrowed sounds quite suspicious, Jyske Bank has posted a special statement on its website regarding this. It begins with the words "Yes, you understood everything correctly" and literally after a couple of paragraphs moves to the main question: "How is this possible?"
The head of the mortgage department answers this verbatim as follows: "I myself do not really understand it. Moreover, I personally said that this cannot be. However, we carried out thorough calculations, took into account all risks – and it turned out that a negative rate is very much possible."
In fact, Jyske Bank clients will most likely still pay a little more than they borrowed, since they will have to additionally cover some mandatory fees as well as legal costs for processing the transaction. Although formally the mortgage rate will be negative.
In addition, it cannot be ruled out that housing prices in Denmark in the coming years will not only not rise, but will even fall. In that case, having repaid the loan, the new owner of an apartment or house will not earn anything or will even lose part of the money.
However, overall the offer still sounds quite tempting – especially for those who were planning to get new housing or refinance an old mortgage loan in the near future anyway.
Although issuing mortgage loans "in favor of the borrower" is a new word in banking, it cannot be called unexpected. And here is why.
Usually banks take money in the form of deposits at an agreed interest rate – that is, the depositor (whether a person or an organization) expects to increase their capital and receive more from the bank than they put into the account. Then the bank issues this money in the form of loans or invests it in securities – at a higher interest rate, to ensure the promised increase for the client and at the same time cover its own expenses.
However, in recent years in some countries – such as Denmark, Sweden or Switzerland – this familiar system has been working in reverse. Inflation there is very low (in Denmark, for example, it fluctuates around 0.2%), and the economy is growing rather slowly, so the cost of loans has fallen so much that banks can no longer ensure the growth of invested money.
Therefore, to cover their expenses, banks are forced to spend clients' money – meaning they introduce zero and even negative interest rates on deposits. For example, Swiss bank UBS announced in early August that it will now charge large depositors (with accounts over 500,000 euros) 0.6% per year. That is, their deposits will not increase monthly but decrease.
On the one hand, of course, keeping money in a bank under such conditions is unprofitable. On the other hand, withdrawing it from accounts to invest somewhere on more favorable terms is also quite costly and fraught with increased risks. Therefore, most depositors still choose a bird in the hand – even if it is losing a little weight each year.
In Danish commercial banks, negative rates have not yet been reached, but at the same Jyske Bank, deposits have long been accepted at 0% per annum – and they are thinking of following the example of the Swiss and taking the rate into negative territory (it's just that no one wants to do it before competitors). From this perspective, negative rates on loans, including mortgages, look completely logical.
Jyske Bank can place free funds on a deposit at minus 0.65% per annum (the Danish central bank accepts money at this rate), and it is more profitable for it to give them out as mortgages at minus 0.5% – the losses will be smaller. Moreover, the bank attracts deposits at negative rates below 0.5%. And here there is profit if these funds are placed even with negative yield but with a positive spread.