Negative interest rate mortgages
Could they happen here?
The New Zealand official cash rate would have to be at least negative 2 per cent before banks would offer negative interest rates on mortgages here, a mortgage broker says.
Jyske Bank, the third-largest in Denmark, has started to offer 10-year mortgages at a -0.5 per cent rate, so that borrowers pay back less than they loaned.
Borrowers will still make monthly repayments but the outstanding amount will be reduced each month by more than is paid back.
Bruce Patten, a broker with Loan Market, said he wouldn’t rule out the
same thing happening in New Zealand but the cash rate would have to be a lot lower.
“The Reserve Bank governor certainly hasn’t ruled out pushing the OCR [official cash rate] into negative territory, however I can’t see borrowing rates to the clients being negative as the banks will still retain some margin so the OCR would have to be -2 per cent or more I would think.”
The official cash rate was cut by 50 basis points to 1 per cent last week in a move which surprised the market. Analysts had been expecting a 25 basis point cut. The rate is at a record low. Patten said given New Zealand was now in uncharted territory he wouldn’t rule negative mortgage rates out.
But John Bolton, chief executive of Squirrel Mortgages, didn’t think it would happen here.
“We won’t see this in New Zealand but it highlights just how low rates can go.”
Bolton said while negative interest rates sounded like a good deal for mortgage holders it was bad news for savers.
“The other side of it though is savers earning nothing or having to pay to store their money at the bank.”
Bolton said Denmark had a very high ratio of household debt as a percentage of income at 235 per cent compared to 164 per cent in New Zealand.
“It has a strong incentive to get rates as low as possible but doesn’t leave anything in the tank.
“If you believe in peak debt and the inability of an economy to use
debt to fund growth indefinitely, then you would argue that Denmark is running into a brick wall.”
Bolton said negative interest rates were not a good thing.
Jyske Bank’s arrangement is so unusual the bank has released an FAQ that includes questions such as “How is that possible?” and statements like “Yes, you read that right”.
Jyske Bank’s housing economist Mikkel Hoegh said: “We don’t give you money directly in your hand, but every month your debt is reduced by more than the amount you pay.”
Hoegh told Danish TV, according to the Copenhagen Post, that “a few months ago, we would have said that this would not be possible, but we have been surprised time and time again”.
The unusual mortgage has been made possible by plunging rates in Denmark, which have also been seen in Sweden and Switzerland.
The downside of that is savers won’t see interest accumulate on their savings, and may also suffer losses.
The Swiss bank UBS told its rich clients last week that it would charge 0.6 per cent a year on deposits of more than €500,000 ($865,000).
Someone taking out a negative interest mortgage with Jyske will still end up paying back a little more than they borrow, when fees and other charges are added.
Reserve Bank governor Adrian Orr has said he is “completely open” to the possibility of negative rates or unconventional tools like quantitative easing.
New Zealand Super Fund chief economist Mike Frith told the Herald that the Reserve Bank is “running out of fire power”.
We don’t give you money directly in your hand, but every month your debt is reduced by more than the amount you pay Mikkel Hoegh, Jyske Bank economist