
Danish bank launches negative interest rate mortgage - neka
https://www.theguardian.com/money/2019/aug/13/danish-bank-launches-worlds-first-negative-interest-rate-mortgage
======
apo
This is all the more surprising given that inflation in Denmark is running
~1%/year.

That means the bank is absorbing a real loss of 1.5%/year on the deal.

Meanwhile, the housing market is roaring:

[https://tradingeconomics.com/denmark/housing-
index](https://tradingeconomics.com/denmark/housing-index)

It would be one thing to see negative rates in a declining property market
and/or in a deflationary environment.

However, negative rate mortgages are happening in what looks like a normal
economy with low inflation and red-hot housing market.

Somebody is very wrong about one or more of the following:

\- the future direction of the housing market

\- the future direction of interest rates

\- the future direction of inflation

Edit:

Google translate sheds some light. It appears that the Danish equivalent of
"points' clouds the picture:

> Total repayments before tax DKK 277,392 (on a DKK 250,000 loan) - of which
> total interest and contributions DKK 8,264 changes in the exchange rate will
> affect the size of the amount paid out.

[https://translate.google.com/translate?hl=en&sl=auto&tl=en&u...](https://translate.google.com/translate?hl=en&sl=auto&tl=en&u=https%3A%2F%2Fwww.jyskebank.dk%2Fbolig%2Fnyheder%2Frealkredit-
med-negativ-rente)

Low, but not negative.

~~~
olau
Some background: In Denmark, mortgages for housing are handled by special
real-estate lenders (realkreditinstitutter) who issue bonds and handles
defaults.

These bonds are considered to be very stable, about the same quality as state
bonds, as the lenders will only lend up to 80% of the value of the house (an
ordinary bank loan must be used for the remaining fraction) so can usually
recover most of the money through a forced sale. Also there's a fee on top of
the bond rate to absorb the losses as far as I understand. The fee depends on
the security percentage, so if the lender only has a security in the top
60-80% part of the value of the house, the fee is much higher, see the tables
here:

[https://www.mybanker.dk/sammenlign/bolig/bidragssatser/](https://www.mybanker.dk/sammenlign/bolig/bidragssatser/)

The Danish central bank has had negative interest rates for some time, and
these real-estate bond rates have also been falling.

When taking out a mortgage, you can either opt for a fixed rate for up to 30
years, or variable-rate bonds where the interest is redetermined periodically,
e.g. once a year. The variable-rate bonds have been negative for some years
now. The news here is that the rates have been falling even more lately, and
that you can now get the negative rate fixed for up to ten years.

In any case, it's the bond investors who are losing money, not the real-estate
lenders who apply a fee on top, both as a rate and a fixed fee when applying
for the loan.

The rates are so low that I think that if you're in the low-risk category, you
might end up with a small negative total rate. Of course, the fixed fees when
obtaining the loan may eat that.

~~~
opportune
>These bonds are considered to be very stable, about the same quality as state
bonds

>can usually recover most of the money through a forced sale

This exact line of thinking is what led to the US real estate crash in
2008/2009

~~~
jjwhitaker
It's a gross simplification, but with the volume that is Danish housing vs
demand for said housing the risk is very low.

One of many issues leading into the 2008 crash was how Us mortgages were
bundled, rated AAA, then resold as an investment tool. However, the ratings
were falsely boosted to promote investment and when the underlying junk
mortgages fell through and demand fell off a cliff with the rest of the
economy there was no way to flip foreclosed housing to make up losses.

In this case, Danish mortgages are not bundled, rated falsely positive, and
not sold as an investment tool like in 2008. Current US auto loans may be much
more similar than these Danish loans.

~~~
kasey_junk
> In this case, Danish mortgages are not bundled, rated falsely positive, and
> not sold as an investment tool like in 2008.

Danish loans are definitely securitized and sold as investment tools. They are
a classic interest rate risk hedge.

It’s been a while since I was adjacent to them but the bigger difference in
Danish mortgage backed securities were a) no governmental guarantee on them b)
less protections for the borrowers than in the US c) no derivatives d) much
smaller market & e) much longer history.

So credit risk, which is what ratings agencies nominally judge is likely not a
problem.

Interest rate risk is though, but given its more straight forward, it’s what
investors are looking for exposure to & there is low leverage it’s unlikely to
cause systemic collapse.

~~~
thedudeabides5
low leverage in proportion to the total asset value

But what’s that total asset value if interest rates are 10% (vs -1%)?

------
kgwgk
Not really. “As a result, oddities now abound. Danish lender Jyske Bank last
week issued a 10-year mortgage bond at an interest rate of minus 0.5 per cent,
meaning homeowners are being paid to borrow.”

In fact the providers of the capital will pay the bank for those mortgage-
backed bonds (they get a negative yield). The bank will get some spread from
the client, who will also pay.

[https://www.google.ch/amp/s/amp.ft.com/content/820e3aac-
ba1a...](https://www.google.ch/amp/s/amp.ft.com/content/820e3aac-
ba1a-11e9-8a88-aa6628ac896c)

~~~
NKCSS
Don't forget the mortage runs for 30 years and after 10 years, you are forced
to pay the rate at that moment... so in the end, it will be ok :)

~~~
adamlett
There no rule that the mortgage will run for 30 years. It’s just what most
people choose. But there’s nothing stopping anyone from paying back the entire
mortgage in 10 years.

~~~
Phillipharryt
I can't find all the fine details on this loan, but there are definitely loans
that stop you from prepayment, or at least have a penalty associated with
them. These penalties can be pretty large and definitely are a reason not to
pay back the entire mortgage before 10 years. In this exceptional case I'm
assuming there is a prepayment penalty for a large portion of that 10 year
fixed rate period.

~~~
systemtest
Those prepayment fines are basically what the bank is losing out on you. If
you have a 3% mortgage and the current rate is 2%, then the bank would lose
out 1% for the current mortgage period. That's the penalty.

~~~
Phillipharryt
That is not how the penalties are worded at all. Penalties are usually in the
form of a percentage of a number of months' interest. I understand the fine is
because the bank makes money on loans by being able to rely on them being a
fixed long term, and the cancellation affects that, but it's not just the bank
passing on that percentage loss directly.

~~~
systemtest
Perhaps it's a country thing. Here in the Netherlands that is how the banks
calculate the prepayment fine. You are allowed to pay off 10% to 20% of the
original sum per year but over that amount you pay a "boeterente" (interest-
fine). It's equal to the amount of money the bank loses by loaning your money
to someone else over the remainder of the fixed period (10/20/30 years).

------
pontifk8r
It seems like a (cynical?) way to turn today's overpriced real estate assets
into a stream of payments. Someone purchasing a home for DKK 300K with no
interest may think they're getting a deal, until they try to resell that home
and find out they cannot sell it for more than DKK 240K.

~~~
klipt
That would imply we're getting into a weird deflationary regime where money
shrinks under negative interest rates, yet still buys more in the future!

~~~
imtringued
The idea of injecting money into the economy by lowering interest rates works
but people usually only get loans for houses or cars. No one buys their
groceries with loans so they are ineffective at increasing prices in consumer
goods and thereby lowering interest rates does not affect inflation despite
the massive cash injection.

~~~
csomar
> No one buys their groceries with loans

Many people do. Credit Cards and Credit lines.

~~~
mcv
Nobody in Europe does.

But I wonder if credit cards will follow suit and offer negative rates.
Somehow I doubt it, though.

~~~
dagw
_Nobody in Europe does._

Bullshit. It's not as popular as in the US, but it's not like credit cards are
unheard of here.

~~~
mujina
At least in Italy, Spain and Germany people mostly use debit cards, and
usually not for groceries, but for online purchases.

------
jjoergensen
Buying a house means taking over a payment and tax liability, it's not just
about owning and controlling an asset. Confidence in the financial system is
apparently so low that someone is willing to pay you fictitious money now in
return of fewer actual cash in the future.

~~~
spaceflunky
What am I missing here? why are they doing this? There has to be some other
gain somewhere else.

~~~
Traster
It's fixed for 10 years. So yes, it's underperforming right now, but the fact
that the yield curve has inverted gives them good reason to believe that
there's going to be a recession in the next 10 years, so actually this is a
relatively good return compared to losing money in the stock market or losing
even more by buying the 10 year govenrment bond which right now is paying
-0.58%.

~~~
spaceflunky
why can't they just sit on the money? Wouldn't that perform better?

------
sleepysysadmin
Not the world's first at all.
[https://tradingeconomics.com/switzerland/interest-
rate](https://tradingeconomics.com/switzerland/interest-rate)

Switzerland has been negative for years.

Negative interest rates mean only 1 thing. The central bank is 100% confident
that they are on the brink of deflationary spiral; much like Greece or Japan.

This is all connected:

[https://news.ycombinator.com/item?id=20615403](https://news.ycombinator.com/item?id=20615403)

[https://news.ycombinator.com/item?id=20654624](https://news.ycombinator.com/item?id=20654624)

[https://tradingeconomics.com/canada/households-debt-to-
incom...](https://tradingeconomics.com/canada/households-debt-to-income)

When you are above 100% disposable debt to income. It means you must stop
spending or your debt continues to increase. 170% is worse than the USA's
financial crisis. Other countries like Australia are up around 200%.

We have reached a long term debt cycle. We are about to have one of the worst
recessions in a very long time OR depression.

~~~
apta
> The central bank is 100% confident that they are on the brink of
> deflationary spiral; much like Greece or Japan.

Is this a good thing for people who hold cash assets? Meaning, would you be
able to buy say a $40,000 car for $20,000 in case this happens?

~~~
sleepysysadmin
That's the problem in Japan. That $40,000 car will be say $38,000 next year;
so why would you buy it now?

The problem is that when people do that, it means people arent spending money
resulting in more deflation.

------
jjazwiecki
Just listened to this Bloomberg podcast, where they interviewed Viktor Shvets
on the meaning/implications/future of negative interest rates:
[https://www.bloomberg.com/news/audio/2019-08-09/what-
negativ...](https://www.bloomberg.com/news/audio/2019-08-09/what-negative-
interest-rates-mean-for-the-world-podcast)

> He argues that undermining the ’time value’ of money–or the principle that
> money available now is worth more than money in the future because you can
> use it to earn additional money–won’t lead to economic growth. In fact, he
> says, negative rates are going to end up leading to a rethink of modern
> capitalism and political society once people realize they have big
> consequences.

~~~
klipt
Isn't that also why economists think excessive inflation is bad? Because it
undermines the "time value of money"?

So to avoid inflation, instead of printing money, we lower interest rates.

But once interest rates go below 0, that also undermines the time value of
money.

Oops.

~~~
zaroth
Lower rates cause _increased_ inflation. Rates are lowered by increasing the
price of bonds, by buying them, e.g. "printing money".

------
_bxg1
Is this good or bad? I don't understand how this can happen unless money
itself loses nearly all value (i.e. storing the paper isn't even worth it,
like in Germany after WWI). Can someone explain further?

~~~
planteen
It doesn't mean the paper is worthless. On the contrary, the paper is more
valuable than many other investment means. You are effectively paying a bank
to guard your money with a negative rate, which makes sense. Guarding and
protecting currency is not an easy task for an individual or business.

Negative interest rates are supposed to spur investment elsewhere. However,
negative rates have not led to the desired economic expansion in places like
Japan that have had them for years.

Inflation is very low in Denmark, near a deflation point, which is generally
considered bad. The bank is trying to spur inflation with these negative
rates.

~~~
AJ007
It will be interesting to see what happens if the US ends up with negative
interest rates. Japanese and EU banks won’t have assets they can buy to get
yield from, nor will the US.

One could consider something like a Gold ETF where a percentage of the gold is
sold every year to pay for the cost of storage as a negative interest rate
cash alternative. You lose money every year too, but central banks can’t print
it.

------
acd
Negative interest rate will increase house asset prices as you will get money
to loan. When there will be inflation due to outside forces a lot of home
owners will have loans under water. The banks will be saved and there will be
new regulation promising never again. Until the next bank crisis for different
reason and so on.

~~~
nabla9
I think you get the effect wrong.

Notice that these are fixed rate loans:

>0-year deal at -0.5%, while another Danish bank, Nordea, says it will begin
offering 20-year fixed-rate deals at 0% and a 30-year mortgage at 0.5%.

Increasing inflation would help those who have taken fixed rate mortgage loan
because the real value of their loan will decrease faster.

~~~
acd
Thanks insightful comment. Increasing inflation will help pay of the loan as
it will get lower through inflation.

I personally think central banks have not understood that lower interest rates
decreases inflation rate. Ie normally and historically central bank would try
to increase inflation by lowering interest rate and thus how many have jobs.
But jobs are now done automatically by software robots and that get cheaper by
lower interest rate to invest in. But central banks thinks lower interest rate
will increase inflation.

~~~
nabla9
The problem is not that lowering the interest rate has stopped increasing
inflation, it's that central banks can't lower real rates enough. They are
facing so called zero lower bound problem:
[https://www.investopedia.com/terms/z/zero-
bound.asp](https://www.investopedia.com/terms/z/zero-bound.asp) This is called
liquidity trap.

You can set the interest rate little bit below zero, but you can't go
significantly below zeor or banks just start storing cash in vaults (it
becomes economically viable to physically store vast amounts of cash). You can
actually think these zero or negative rate mortgages as bank's way to store
capital.

I don't think the root cause is financial or monetary policy. Developed
countries are aging and their economic dynamics is fundamentally changing and
they become prone to having secular stagnation. Japan led the way, Europe and
the US will follow.

------
bawana
Why doesn’t the danish govt just print more money? Although part of the eu,
they opt out of the monetary policy and still use the kroner. OTOH, how much
of the eu debt does Denmark own— and vice versa. If they affect the kroner-
euro exchange rate then they could lose money if it moves the wrong way.

~~~
useerup
This situation (negative interest rate) occurs because there is a capital
surplus.

This happens because investors a wary of putting too much of their capital in
stocks. Nobody knows what Trumps trade wars will lead to, so that's a
significant risk factor for stocks.

Consequently, investors look for other places to put their money until the
uncertainties gets cleared up. Preferably somewhere _safe_ \- meaning not
necessarily in a bank as banks can fold. Danish real-estate bonds fits that:
The Danish real-estate market is generally considered sound.

Furthermore, Denmark has a declared policy of closely following the Euro. The
DKK has to be within a narrow band of 2.25% (IRRC) of the Euro. Having
followed this policy ever since the EMS disbanded, investors generally trust
this commitment.

Which means that until Trump cleans up the disturbance he has created,
investors will flee stocks and look for safe bonds, to the extent that
lenders/investors will actually _pay_ for safe investments.

While attractive for lenders, it is a sign that something is very wrong with
the economy. In a healthy climate money would flow to the stock market.

------
jonplackett
Can someone explain simply how they make money doing this?

Or how the institutional investors they mention make money?

~~~
martin_bech
Ill try.. danish morgages are based on bonds, just like government bonds, but
realestate instaed. So the issuer just takes a small cut, dosent matter for
them if rates are 10% or negatve 1%, (they take about 0,6%).

Now who buys the bonds then and “loose” money? Mostly institions,
pensionfunds, corporations and normal investors. They take on theese
investors, because they have to.. rates in banks are even lower (even more
negativ), and deposits are only insured for about 100.000euro. These bonds,
while negative, are more secure, and less negative.

~~~
joshuaheard
Why don't they buy gold or some other asset that does not lose money like
this?

~~~
nabdab
People keep missing the rate. The effective annual rate of the loan is 2%
because you don’t get the full amount payed out/ the principle is higher than
the loaned amount.

This is effectively saying that someone is willing to loan you 1mil, and pay
you negative interest on a loan of 1.1mil as long as you pay a fixed payback
per month. So end of line you still payed more than you got, but every month
instead of paying a bit more than your fixed payback, it’s slightly lower.
Bank still makes money selling you the loan, investors still get more money
back than they invest. Only thing noteworthy is that some of the math that
used to be related to the fixed monthly positive interest is now covered by
the upfront rate of getting the loan.

~~~
kgwgk
> investors still get more money back than they invest

No, they don’t. That’s the point. The reference rate is negative because the
investors are buying bonds which will lose money.

~~~
nabdab
They are buying at a conversion rate. So they buy for instance a 100k bond for
95k, since the the time is fixed and payments are forced, you end up
guaranteed a 2.1% net interest even though the running interest on the
principle from month to month is fixed.

~~~
kgwgk
It seems clear that the bond holders will not be getting any positive coupon
and they are guaranteed to lose money. That's why this is in the news and
we're talking about it.

As far as I understand the issuer cannot just sell the the bonds at 105% or
whatever to account for the loss upfront with the price converging to 100% in
10 years (because these are callable bonds) and apparently they have some
technical problems to implement negative coupons: "The negative callable bond
is creating some technical difficulties. Jyske said it will initially be
registered as a floating-rate bond until the systems of VP Securities,
Denmark’s central securities depository, are adapted to handle negative
coupons for fixed-rate bonds."

[https://www.bloomberg.com/news/articles/2019-08-05/first-10-...](https://www.bloomberg.com/news/articles/2019-08-05/first-10-year-
notes-at-negative-coupons-hit-covered-bond-market)

In case you think negative yields cannot happen, it is definitely possible.
Many government and corporate bonds in Europe are trading at a price which is
above the value of the nominal plus all the remaining coupons.

Germany has issued last month zero-coupon bonds which were sold above par and
they are trading now at 106.87 euros (and the only thing you will get back if
you hold them to maturity is 100 euros in 2029).

[https://www.deutsche-finanzagentur.de/en/fact-sheet/sheet-
de...](https://www.deutsche-finanzagentur.de/en/fact-sheet/sheet-
detail/productdata/sheet/DE0001102473/)

~~~
kgwgk
> they are guaranteed to lose money

To be fair, I imagine it could still happen that these bonds have zero or
positive yield if they are bought at more than a 5% discount, but in that case
why would the issuer bother offering negative coupons in the first place?

------
kebman
Here's the actual bank source, in Danish:
[https://www.jyskebank.dk/bolig/nyheder/realkredit-med-
negati...](https://www.jyskebank.dk/bolig/nyheder/realkredit-med-negativ-
rente)

------
chvid
Danish mortgage bonds are effectively guaranteed by the Danish state and there
are only a few actual government bonds in circulation. The interest rates go
below 0 because investors don't trust banks with their money.

~~~
Someone
_”The interest rates go below 0 because investors don 't trust banks with
their money.”_

If investors didn’t trust banks, they would demand high interest rates when
borrowing banks their money, just as they demand higher interest from those
who want to make smaller down-payments on houses, or on credit card debts.

Looking at [https://www.investing.com/rates-bonds/european-government-
bo...](https://www.investing.com/rates-bonds/european-government-bonds), many
European countries (even Spain and, short-term, Italy) can borrow money from
the market at negative interest rates.

That must mean those borrowing them money must be confident they will get that
money back (not that surprising, given that the ECB keeps printing money)

------
xivzgrev
Woo!! Give me one of those negative interest mortgages here in the US for my
house - I’ll gladly pay some points for it.

What a world we live in.

------
0x0
The effective interest seems to be above 0% though. The linked FAQ shows
calculations where the total amount paid back is more than the total loan
amount. Plus some talk about some kind of exchange rate(?) seems like this
could be even riskier than normal?

~~~
nabdab
The “Exchange rate” is the kurs(Danish) when the loan is for instance at
kurs95 that means you only get 95% of the loaned amount. Effectively the
investor gets a bigger principal than was actually loaned. Depending on
invester pressure the kurs goes up, but It’s typically close at 100, and a
lower rate loan is then opened up, since investing in a kurs100+ loan means
taking an emidiate hit on the principal owed, which is bad for investors even
if interests pay back the gap over time.

And true, even with negative rate this loans kurs plus fixed costs still mean
you are still paying the bank more than they are loaning you.

~~~
nybble41
> Effectively the investor gets a bigger principal than was actually loaned.

This difference between the amount loaned and the amount paid back over the
life of the loan is commonly referred to as "interest".

It really feels like they're just playing semantic games here. Any proper
comparison of APRs would include both components. A true "negative interest
rate mortgage" would be one where the bank pays _you_ to borrow money, with
the total amount borrowed being greater than the total amount paid back to the
bank.

------
aszantu
what does that mean for poor people, does someone know? Can someone explain?

~~~
UnFleshedOne
Poor people are screwed up regardless -- if rates are high, they can't afford
payments, if rates are low, prices rise and they still can't afford payments.
Not to mention getting downpayment.

Workaround: don't be poor.

~~~
davidw
Do rising prices spur the construction of more homes in Denmark?

~~~
scandinavian
Seems pretty steady:

[https://i.imgur.com/wF6PCnU.png](https://i.imgur.com/wF6PCnU.png)

2019 is not over yet, so maybe it's a little higher this year.

This is only for "parcelhuse", which wikipedia defines as: "Single-family
detached home".

~~~
davidw
Homes come in a lot of shapes and sizes though - in Italy where I lived for a
number of years, it's pretty common for people to live in a flat in a
4/6/8/whatever unit building, either as owners or renters.

Depending on where demand is, I'd expect more of that sort of thing too, if
it's allowed. In the US, it is forbidden to build those kinds of homes in
large areas of our cities.

~~~
scandinavian
[https://i.imgur.com/2iCJllW.png](https://i.imgur.com/2iCJllW.png)

Here is the graph for multistorey apartment buildings. I'm not smart enough to
interpret what this means. In the big city I live in in Denmark, most new
apartment buildings are luxury apartments and expensive as hell, so I don't
think they are a result of rising house prices.

~~~
davidw
In general, new construction is expensive, but if you cut off that supply,
people with money just bid up prices on older housing.

Looks like the graph kicked up in response to something... that's good, I
guess.

------
ptah
this is pretty awesome. hopefully it spreads across europe

~~~
buboard
this isn't free money

~~~
martin_bech
It actually is.. any morgage below infation, is free money..

~~~
buboard
You really think a for-profit bank would give more than it takes?

~~~
useerup
The bank takes it's share in the form of fees. The negative rate is simply
because the money market sees negative rates on the 5-10 year horizon. The
bank simply passes the rate of the money market on to the consumer:

> Høegh said Jyske Bank is able to go into money markets and borrow from
> institutional investors at a negative rate, and is simply passing this on to
> its customers.

Negative bond rates happen when there is a surplus of capital looking for
"safe havens". Some investors are willing to _pay_ to have money placed safely
for a number of years. The Danish real-estate bonds are regarded as a very
safe haven.

------
trilila
North European countries are a template of success. And this is just another
example of it.

------
devoply
We need to see more of this so we can transfer wealth from the rich to the
poor more effectively and get them to invest in the economy.

~~~
nabdab
More money is loaned to the rich than is to the poor. So this is giving more
money to the rich than it does to the poor.

