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.
You may hear a lot of ads for refinancing your mortgage because of historically low interest rates. But, only a small number of people searching for prime mortgages will qualify for the really low rates:
Have a look at a key detail about the criteria for mortgage quotes from which Freddie derives its weekly mortgage interest survey:
The survey is based on first-lien prime conventional conforming mortgages with a loan-to-value of 80 percent…
But the second criterion is even more significant. Let’s say that you have a house worth $200,000 and a mortgage balance of $175,000 that you want to refinance. Your loan-to-value ratio would be 87.5%, so you wouldn’t be included in this average. You might manage to achieve a low rate, but someone with so little equity shouldn’t expect to necessarily achieve rates near this average.
So those qualifying for these ultra-low rates must have pretty spotless credit histories and a pretty significant chunk of equity. That excludes anyone underwater or even slightly above water. And unfortunately, they’re the ones who would benefit most by refinancing. According to real estate analytics firm CoreLogic, about three-quarters of underwater borrowers have mortgage interest rates above 5.1%.
So the low interest rates only really help people who don’t need the help as much? Not much relief then for people looking to lower their payments and perhaps stay in their once-overvalued houses.
This reminds me of an issue that has kind of disappeared from the national news: what about plans to adjust mortgages? As long as the jobs situation remains difficult, have government programs and mortgage lenders made changes so that a good number of people can stay in their homes?