The first negative mortgage rate has been revealed by Denmark’s largest bank. Jyske Bank now offers 10-year fixed rate mortgages at a rate of -0.5%. Now the question is: What does a negative rate of interest for borrowers signify?
Even though mortgage rates are lower than 0%, the monthly payments that borrowers have to make towards their principal would not be affected. Market Watcher Jacob Passy stated that borrowers would eventually pay less than they borrowed.
He said that they would have to continue to pay additional costs and fees.
The bank would pay the borrower to borrow money.
“We don’t give you money directly in your hand, but every month your debt is reduced by more than the amount you pay,” Jyske housing economist Mikkel Høegh told The Guardian.
Nordea Bank of Finland announced that it will offer fixed-rate Danish mortgages with 0% interest over a 20-year period. Nordea Bank plans to offer 30-year, interest-free home loans. Average interest rates for Danish 30-year mortgages are 0.5%.
Negative mortgage rates can now be implemented in Denmark and other European countries like Sweden and Switzerland, as the rates in their money markets have fallen to uncharted territory. Wall Street Journal claims that Denmark was the first country to adopt negative rates in 2012. Current cash rates for Denmark are -0.65%.
The purpose of the negative cash rate is to encourage people borrowing more and spending more. It discourages people from saving. The WSJ report states that this would in theory stimulate economic activity.
Are negative mortgage rates possible in Australia?
Phillip Lowe, Governor of Australia’s Reserve Bank of Australia, stated recently that the central bank is ready to do “unconventional things” to help boost the economy.
“It’s possible that we end up at the zero lower bound. I think it’s unlikely, but it is possible. Lowe stated that “We are open to doing unconventional things if the circumstances warrant it.”
Jack Derwin, market watcher and author a Think Piece inBusiness Insider, said that negative rates could cause the financial markets to go down.
Negative interest rates refer to money that can earn interest instead of earning it. Even more shocking was the fact that banks can lend money to individuals.
If the interest rate was cut to -2%, for example, $100 loan borrowers would receive $2 per year. The interest rate would be cut to -2% for those with $100 deposit. They would get $98.
Aside from encouraging people to spend their money, negative rates would weaken Australia’s currency, which, in turn, would boost exports — another positive driver for the economy.
The downside is that negative rates of interest offer no tangible benefits.
“This was the effect of negative interest rates in countries that had attempted it, as per 2016. Derwin explained that, with the exception of Sweden, which saw a slight improvement in its economy’s performance, other countries got worse. This left negative interest rates’ track records unproven.