Jyske Bank, the third largest Danish bank, has launched the world’s first negative interest rate mortgage. This means that the bank will pay borrowers 0.5% a year to take out a loan with them.
This effectively means that Jyske Bank will pay you to take money from them and consequently you will pay back less than they have loaned. Too good to be true?
This bank is offering a 10-year deal at -0.5% whilst another, Nordea Bank Abt, is set to offer a 20-year fixed-rate deals at 0% and a 30-year mortgage at 0.5%.
Under its negative mortgage, Jyske said borrowers will make a monthly repayment as usual – but the amount still outstanding will be reduced each month by more than the borrower has paid.
Jyske’s housing economist, Mikkel Høegh has stated that “We don’t give you money directly in your hand, but every month your debt is reduced by more than the amount you pay,”
This incentive is aimed at keeping the property market moving and encouraging investors to keep participating in real estate deals. Also, as the length of the loans are short, these are meant to be used to finance home improvements or repairs rather than to finance the purchase of an entire house.
How is this possible? Denmark, Sweden and Switzerland have seen the money markets drop and are able to borrow from institutional investors at a negative rate and are then passing these savings onto the customers. If the bank is borrowing from central bank at a -1% interest rate they can profit by offering the customer the 0.5% discount.
The downside of this is that savers will see nothing paid in interest on their deposits which may also end up in the negative. There could also be expensive account arrangement costs, so the investor may potentially lose any savings on using this type of loan.
Jyske – which is the Danish equivalent to Halifax or Nationwide in the UK – have seen interest rates on deposits falling to zero; and banks in Denmark are now toying with the idea of following Switzerland’s lead who have announced plans for later in the year to give negative rates (-0.75%) on deposits – this is aimed to hit wealthy clients who deposit more than 2 million Swiss francs – depositors will therefore have to pay regularly to keep their money with the bank. The Bank of England’s base rate is currently 0.75%, and the European Central Bank’s is zero, in Denmark (which is not in the eurozone) the equivalent rate is -0.4%.