A bank in Denmark explains how they can make money by offering mortgages with interest rates below zero:
Jyske Bank has had to do a lot of clarifying; there’s a widespread misconception that the bank is actually paying borrowers to take their money. First of all, the bank is not actually paying anyone; it is simply forgiving part of the loan each time a payment is made. A mortgage borrower is likely to end up paying Jyske back a little more than they borrowed, factoring in fees and charges associated with arranging the mortgage loan.
And the bank can afford to do this without losing money because it borrows at negative interest rates as well…
Despite being in “historic remortgaging,” Høegh said the negative interest rates don’t actually make it any easier for home buyers to get a loan, but makes it easier to get a bigger loan – a lower rate means a higher disposable budget.
As long as the borrower is paying more in interest than the mortgage cost the bank, there is money to be made.
I might be showing my ignorance here but it leads to a few more questions:
1. Does this change how much volume in mortgages banks and lenders need to make in order to make money?
2. Would an extended period of such mortgages lead to inflated housing values because people can pay more for homes?
3. These changes might not be so bad in a fairly stable housing market but I wonder if there would be more issues in a high-demand or high-price market.
It looks like we would have a ways to go before negative rate mortgages come to the US but it would be interesting to see what happens if they do come.