If Carlsberg Made Mortgages, They’d Be Negative Interest Mortgages

August 21, 2019

Denmark is well known for its bacon, beer and butter but this month the world’s attention has moved onto Danish mortgages that come with a negative interest rate.

In the UK we’ve become accustomed to low interest rates on mortgages in recent years. Competition between banks and building societies coupled with a low Bank of England base rate has helped keep them that way for more than a decade but we've never seen anything like what is happening in Denmark.

There has to some extent been a race or perhaps a slow decline towards 0% mortgages across the world. Average mortgage interest rates in the UK, for example are currently as low as 1.65% for a 2-year fixed rate and just 2.63% for a 10 year fixed rate mortgage.

In the US the average 30-year mortgage is at its lowest since 2016 at 3.6% while in France the average mortgage interest rate is just 1.39%. If paying just over 1% interest on your mortgage sounds a bit much then in Germany the rate is even less.

You may only need to pay 1% interest on a 10 -year-loan with some offering 0.5%. Denmark on the other hand takes mortgage rates to new depths this month at -0.5% - becoming the first country in the world to offer negative interest rate mortgages.

So how does a negative interest rate mortgage work?

This is a question a lot of people are struggling to get their head around. Like anything we borrow in life we expect to give something in return. What we don’t expect is to be paid for borrowing but this is indirectly what is happening in Denmark.

While the banks are not exactly handing cash to their mortgage customers each month the debt on the mortgage each month is reduced by more than the amount you are paying.

How, might you ask, are banks able to sustain themselves giving money away in this way?

The answer to this lies in the money markets where Denmark’s banks are currently able to borrow money themselves at a lower negative rate than they offer their mortgage customers.

So for lucky homebuyers in Denmark, buying a house at the moment is a bit of a win win if the loan to value ratio is high enough (you won’t get the negative rate if the ltv is to high).

Perhaps the big question is this is all well and good for the Danes but what about us British?

Negative rate mortgages don’t seem to be on the horizon here in the UK with banks being discouraged from dropping rates too low. The Central bank base rate in Denmark is also negative at -0.4% compared to the UK’s 0.75%. This means the conditions are not currently right for negative interest mortgages in the UK.

For Denmark, there is the downside of a possible future where negative interest rates are applied to deposits. While Denmark’s banks are apparently reluctant to do this, it is already happening with some Swiss banks on deposits of £500,000 plus. The same could also happen in the UK but history tells us things could go in the opposite direction.

When the UK pulled out of the European Exchange Rate Mechanism in 1992 the bank of England base rate hit 12%. So if you are thinking about taking out a mortgage anytime soon, now might be the time to lock in a low interest rate before any Brexit upheaval.


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