Over the past year, mortgage rates have dipped to historical lows — offering buyers a break at closing time and giving homeowners the chance to refinance before rates begin rising. But an announcement by Jyske Bank on Sunday begs the question: Just how low can we go?
The Danish bank made history on Sunday when it introduced the first-ever negative interest rate mortgage. The 10-year mortgage comes with a -0.5 percent interest rate, which means that borrowers’ outstanding balance will be reduced by more than what they pay each month.
“We don’t give you money directly in your hand, but every month your debt is reduced by more than the amount you pay,” said Jyske housing economist Mikkel Høegh in a statement to The Guardian.
Høegh explained that Jyske is able to offer a negative interest rate mortgage because it’s able to borrow from investors at a negative rate, and “is simply passing this on to its customers.”
Some Inman readers on Coast to Coast seemed to relish the idea of negative interest rate mortgages. “I’m moving to Denmark,” said one commenter while another wondered if U.S. citizens could borrow from the bank. Meanwhile, there were handful of skeptics who wondered how Jyske could offer such a deal.
“It would sure help homeowners. Imagine putting that back to pay down principle year after year,” said someone else. “What I don’t get is: what kind of economic forces are at play that make this work?”
Zillow Director of Economic Research Skyler Olsen says the skeptics are right — despite the lure of being ‘paid’ to take a loan, American homebuyers wouldn’t want negative interest rate mortgages to reach our shores.
“You might think that [negative rates] would be seen as stimulus, just like we think of low mortgage rates now,” Olsen explained in an email to Inman. “And that’s the idea of potentially encouraging rates to go lower, hence all the central bank activity.”
Olsen’s assessment highlights what Høegh left out of his statement — central banks across Europe (including Denmark) and Asia have been dramatically cutting rates in the hopes of warding off a dramatic economic downturn.
“The cuts are meant to boost money supply in the economy as well as demand,” read an analysis by Business Insider. “While Denmark’s last central bank rate cut was less than a quarter of a percent in 2015, the country has a very low rate currently, at .05 percent, and the rate in the Euro Area as a whole stands at 0 percent.”
Despite a federal interest rate cut of our own in July, Olsen says its “very unlikely” that we’d see such a dramatic decrease in the United States thanks to a strong economy, a growing population and consistent inflation.
“Inflation [would need to] mute dramatically,” she said of the economic conditions needed for a negative interest rate to happen. “Economic growth [would need to] slow significantly for a long period of time.”
Furthermore, Olsen says that negative interest rates would tank the housing market for two reasons: Lack of creditworthy buyers and higher home prices.
“The downside is that only very, very exceptional borrowers have access to these dream-like mortgages,” Olsen said, noting it could create a potentially dry lending environment.
“There’s also a concern that some or all that housing market stimulus from a low rate environment is absorbed by higher housing prices,” she added. “By keeping mortgages attractive, you make home buying attractive and push more folks than otherwise toward home buying when the inventory just isn’t there.”
“That leads to higher prices.”