To Explain The Danish Negative Interest Rate Mortgage

Denmark now has a bank – perhaps building society or savings and loan – offering a negative interest rate mortgage. You end up paying the bank back less than you originally borrowed. Which does sound pretty mysterious but it’s possible to explain this very simply:

The krone is pegged to the euro via the ERM II, the European Union’s exchange rate mechanism.

You can either control your exchange rate or your interest rate but not both.

The story itself:

A Danish bank has launched the world’s first negative interest rate mortgage – handing out loans to homeowners where the charge is minus 0.5% a year. Negative interest rates effectively mean that a bank pays a borrower to take money off their hands, so they pay back less than they have been loaned. Jyske Bank, Denmark’s third largest, has begun offering borrowers a 10-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%. Under its negative mortgage, Jyske said borrowers will make a monthly repayment as usual – but the amount still outstanding will be reduced each month by more than the borrower has paid.

You don’t, of course, get any interest when you make a deposit in your account at that same bank. And the bank itself can borrow from large institutions at negative rates. So, it’s just passing on its own cost of money to its customers.

But then the question just becomes, well, why is the interest rate on the Krone negative? Because of that tie to the value of the euro. The euro, as we know, being screwed by being the euro. The idea that Greece, Italy and Germany should share the same currency being ludicrous to start with. And it has also meant that the entire eurozone is flatlining in terms of economic growth and will continue to do so. Low and lower interest rates are that traditional solution for that sort of thing.

Denmark’s not part of the euro and so doesn’t have to do this. And the Danish economy is wandering along just fine outside. Except for that decision to peg the foreign exchange rate. Once you peg the FX rate you’ve got to set interest rates to peg the FX rate. Which is why Denmark has negative interest rates.

It’s a blindingly stupid thing to do of course but then this is the European Union we’re talking about here….

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Firefoxx

Great idea – can I take a 2nd mortgage on my already owned house at -0.5 pct and generate free cash? Fantastic!

Quentin Vole
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Quentin Vole

Before there was the euro, the Danish Krone was pegged to the DM, they simply carried it across. It would seem that small economies can get away with this (see various S and Central American countries and the $), but you lose the ability to set your own interest rates to suit your own economy.

If we ever see Joxit (can’t come too soon for me), the Scots would probably have to peg the Bawbee to Sterling (as Eire did with the Punt), with the same issues.