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Some European Banks To Offer 0% Rate and Negative Rate Mortgages
“Denmark’s Jyske Bank is now offering a 10-year fixed-rate mortgage at negative 0.5%. ... Additionally, Finland-based Nordea Bank announced Wednesday that it will offer a 20-year fixed-rate mortgage in Denmark that charges no interest, and the bank is preparing for the possibility of home loans up to 30 years in duration having negative rates.”
Well, I sure don't know, but how the heck does a lender make a reasonable profit on a negative rate mortgage? Can't be only from transaction fees. I'm imagining even the smallest amount of inflation during a 30 year fixed mortgage period. Perhaps an Adjustable Rate Mortgage would be the charm. Note: ARM's burned some borrowers a few decades ago.
If I owned FlipFlop Bank, and was asked to lend money for a house with a negative rate; the doors would have to shutter. I have not looked for a mortgage contract from Denmark, but may as time allows. Let us know if you find one and post a link.
“ ... how the heck does a lender make a reasonable profit on a negative rate mortgage?”
In the same way they would when rates are positive: Loan money out at higher rates than they have to pay for it. So, to make money on a - (negative) 0.50% mortgage, the bank would need to obtain the funds from its depositors at a negative 1% or negative 2%.
Confusing yes. Has something to do I think with Einstein’s Theory of Relativity.
I suppose.....hopefully; not unlike the spread today on a 30 year mortgage. But, as a low profit spread; not unlike a grocery store today, or how Kmart started and operated for years........a boat load of product, volume, volume, volume. I'm still trying to imagine such a large volume of loans, especially spread among so many lenders in this country. Denmark and large volume, well; I don't know. Have a peaceful remainder.
Apologies @Catch22. Looking back at his earlier post I see that it contains a link to an excellent commentary explaining how the bank in Denmark intends to make a profit on those negative rate mortgages. So you only asked the question rhetorically. Thanks for that great link.
And agree with OJ. Can’t end well. I’m guessing we’re going to get blindsided by a substantial bump in inflation some day. Rates will reverse in short order. There will be hell to pay. Congress will investigate.
For those too young to remember the 70s: For some of us who lived through it, a “little bit of inflation” is akin to being “a little bit pregnant”.
It is nuts to have mortgage rates go negative. Does that imply mortgage-back bonds will also have negative yield? For income investors what is the point to hold these bonds?
For the old-timers here who remember the poster "Scott", you may recall that back in 08/09 he was very negative and pessimistic regarding the efforts of Ben Bernanke and the Fed to try and get the economy back on a growth path.
He and I frequently were on opposite sides of that debate- he thought that we needed a large dose of austerity (per the old "Vienna" school), and I, a firm Keynesian, argued that anything and everything that Bernanke was trying was a much better approach, given the experience of the Great Depression.
At this point I'm not quite so sure that I was right back then. Perhaps the present screwy situation is at least partially due to the many novel things that the Fed did back then? I wonder if anyone has any thoughts on this.
@Old_Joe and @hank: I'm of an age that I remember the 70's, not with any wistful nostalgia. In 1971 there was a gas war here in MI during which a station branded "Progessive" posted a price of 19.5 cents/gallon. Energy was so cheap that in '73-4 our annual bill for heating, hot water and clothes dryer was $175. We soon paid the piper, however, when OPEC organized two oil embargoes. Then, you could not find a gas station with gas and if you did, the wait caused cars to snake down the street.
Many signal economic and political events wracked my least favorite decade: Nixon took us off the gold standard; "I'm-not-a-crook" and Kissinger prolonged the war in Vietnam during the electoral campaign of 1968 and then proceeded to get us "peace with [extreme] dis-honor." Watergate convulsed the whole nation so badly that a "clean-for-Gene" voter like me was cheering for the disgusting racist Sam Ervin of NC to put the senatorial screws to Tricky Dick. A dunderhead replacement president then pardoned the latter, who ended up being lionized for having established diplomatic relations with the PRC. Remember the "ping-pong diplomacy?" A cardigan-toting chief executive then turned the heat way down in the White House and cajoled (sweetly, with a disarming drawl) us to drive 55. Where oh where did the 19.5 cent gas go? Investors endured a momentous bear market that simply would not end during this bleak decade while interest rates and stagflation stuck knives and twisted them in the guts of every American. In 1980, I had CDs at the local savings bank paying 16.5%. Did attentive readers catch the allusion above to the nation's loss of some 58,000 souls? Others, who were fortunate enough to manipulate a rigged system (myself included) to avoid losing our lives in vain, witnessed the display of Old Glory as a giant "up yours" to any sane member of the populace who expressed doubt as to the conduct of the war. To this day, I can't help feeling that a flag sticker or jacket patch is an insult or a warning to me.
Did anything good happen in the 1970's? Leisure suits? Mao jackets? Long hair? To be fair, there was some great music performed and recorded. If you lived through this decade, I'm sure your mileage was different from mine. I do recall totaling a VW in NM in 1972 and having to rent a Dodge Monaco to complete our trip. The best it could do was 9 MPG on gas that cost a ruinous 44 cents/gallon in the desert of Arizona. Maybe it is different this time...
The weird thing looking back is that inflation than was still well under 10%. Took several more years before it peaked. At 10-15% annual inflation (which I recall vividly) when shopping you’d see many employees in the aisles working full time just changing the prices on the shelf items, as prices were rising faster than they could keep up.
My point earlier: Inflation becomes “baked in the cake” under that kind of scenario. Doesn’t just disappear the next year. Every year thereafter, those price increases compound on top of the earlier year. So 10-15% yearly inflation can get you to 50% in just 3-4 years time. And that’s a looming catastrophe for retirees. Yes - some items will go down in price, namely tech and cheap imports. But other costs, like the service sector and raw materials compensate in the other direction.
Comments
ARM's burned some borrowers a few decades ago.
If I owned FlipFlop Bank, and was asked to lend money for a house with a negative rate; the doors would have to shutter.
I have not looked for a mortgage contract from Denmark, but may as time allows. Let us know if you find one and post a link.
Mortgage lender, able to clear a profit with negative rates ?????
In the same way they would when rates are positive: Loan money out at higher rates than they have to pay for it. So, to make money on a - (negative) 0.50% mortgage, the bank would need to obtain the funds from its depositors at a negative 1% or negative 2%.
Confusing yes. Has something to do I think with Einstein’s Theory of Relativity.
But, as a low profit spread; not unlike a grocery store today, or how Kmart started and operated for years........a boat load of product, volume, volume, volume. I'm still trying to imagine such a large volume of loans, especially spread among so many lenders in this country. Denmark and large volume, well; I don't know.
Have a peaceful remainder.
And agree with OJ. Can’t end well. I’m guessing we’re going to get blindsided by a substantial bump in inflation some day. Rates will reverse in short order. There will be hell to pay. Congress will investigate.
For those too young to remember the 70s: For some of us who lived through it, a “little bit of inflation” is akin to being “a little bit pregnant”.
He and I frequently were on opposite sides of that debate- he thought that we needed a large dose of austerity (per the old "Vienna" school), and I, a firm Keynesian, argued that anything and everything that Bernanke was trying was a much better approach, given the experience of the Great Depression.
At this point I'm not quite so sure that I was right back then. Perhaps the present screwy situation is at least partially due to the many novel things that the Fed did back then? I wonder if anyone has any thoughts on this.
Many signal economic and political events wracked my least favorite decade: Nixon took us off the gold standard; "I'm-not-a-crook" and Kissinger prolonged the war in Vietnam during the electoral campaign of 1968 and then proceeded to get us "peace with [extreme] dis-honor." Watergate convulsed the whole nation so badly that a "clean-for-Gene" voter like me was cheering for the disgusting racist Sam Ervin of NC to put the senatorial screws to Tricky Dick. A dunderhead replacement president then pardoned the latter, who ended up being lionized for having established diplomatic relations with the PRC. Remember the "ping-pong diplomacy?" A cardigan-toting chief executive then turned the heat way down in the White House and cajoled (sweetly, with a disarming drawl) us to drive 55. Where oh where did the 19.5 cent gas go? Investors endured a momentous bear market that simply would not end during this bleak decade while interest rates and stagflation stuck knives and twisted them in the guts of every American. In 1980, I had CDs at the local savings bank paying 16.5%. Did attentive readers catch the allusion above to the nation's loss of some 58,000 souls? Others, who were fortunate enough to manipulate a rigged system (myself included) to avoid losing our lives in vain, witnessed the display of Old Glory as a giant "up yours" to any sane member of the populace who expressed doubt as to the conduct of the war. To this day, I can't help feeling that a flag sticker or jacket patch is an insult or a warning to me.
Did anything good happen in the 1970's? Leisure suits? Mao jackets? Long hair? To be fair, there was some great music performed and recorded. If you lived through this decade, I'm sure your mileage was different from mine. I do recall totaling a VW in NM in 1972 and having to rent a Dodge Monaco to complete our trip. The best it could do was 9 MPG on gas that cost a ruinous 44 cents/gallon in the desert of Arizona. Maybe it is different this time...
@BenWP - Thanks for the trip down Memory Lane. In August 1971 I had just landed my first decent paying job post-college in downstate MI. Remember driving down I-75 in anticipation of the first day at work when over the radio came news that Nixon had just imposed nation-wide Price and Wage Controls in an effort to halt runaway inflation. https://www.nytimes.com/1971/08/16/archives/nixon-orders-90day-wageprice-freeze-asks-tax-cuts-new-jobs-in-broad.html
The weird thing looking back is that inflation than was still well under 10%. Took several more years before it peaked. At 10-15% annual inflation (which I recall vividly) when shopping you’d see many employees in the aisles working full time just changing the prices on the shelf items, as prices were rising faster than they could keep up.
My point earlier: Inflation becomes “baked in the cake” under that kind of scenario. Doesn’t just disappear the next year. Every year thereafter, those price increases compound on top of the earlier year. So 10-15% yearly inflation can get you to 50% in just 3-4 years time. And that’s a looming catastrophe for retirees. Yes - some items will go down in price, namely tech and cheap imports. But other costs, like the service sector and raw materials compensate in the other direction.