The wondrous world of a mortgage where the bank pays you
03 February, 2015
Tonight you're going to talk to us about something most people would have thought an impossibility until today. Is that right?
I guess that's right, Larry. Negative mortgage rates are a crazy concept that even some economists struggle to comprehend. A negative mortgage rate implies that it's not the borrower, but the lender, who pays the interest on a loan.
You might now be thinking. Did I just hear him right? There is no way that someone could go to a bank, take out a mortgage, and expect the bank to give them money every month? That's ridiculous.
Well for the first time in history, at least that I'm aware of, this is exactly what happened in Denmark last week.
Most of us have heard of teaser rates or even reverse mortgages. Is this one of those things?
No, it's not. Neither is it some kind of scam.
Your skepticism is totally understandable though. After all most people would assume the natural interest rate could never be negative. Simply because they assume no rational person would lend their hard earned money to in turn receive back less in the future.
That's right. So how is this possible then?
I realise this entire concept blows most people's minds, as it does mine, but we must first appreciate that, unlike things here in New Zealand, the economic environment in Europe, and in particular Denmark, is far from normal. Most parts of the continent are now mired in the extremely rare situation where prices of goods and services are actually falling month by month, otherwise known as deflation.
Now deflation can be extremely harmful to an economy if it becomes entrenched in people's mindset. So in an attempt to get people back spending, authorities across Europe have taken the drastic step of charging banks for holding onto the deposits they take in. Faced with the option of paying to hold someone's money in their vaults or to lend that money out and pay the borrower a slightly less amount, banks are actually making a somewhat logical decision.
Deflation or not, I presume are Danish households are lining up to be paid to borrow, right?
It's a little hard to tell at this stage, given the first negative mortgage rate was only offered last week, but I would imagine borrowers would welcome this development with open arms, as they certainly would here.
As for if this manufactured "free be" for borrowers is successful in creating sustainable economic growth and with it ending deflation, that is a quite a different question. I for one am a little skeptical that this in itself will get these economies moving again.
But, in saying that, it will without doubt help. And when combined with the positive effects that the lower oil price and lower exchange rate will start to have on those economies, there are a number of reasons to feel that all is not quite as bad as negative mortgage rates assume.
Can we expect anything like this in New Zealand anytime soon?
I strongly doubt it. The New Zealand economy is gradually slowing, yes, but we as a country find ourselves in an extremely enviable position compared to much of the world, let alone Europe — which is obviously really struggling at this stage. This is in terms of our low relative debt levels, higher employment, younger workforce, and the list goes on.
I'd also add that before we go wishing for negative mortgage rates anytime soon. We must appreciate that to get to a point where banks would be forced into such actions; all of those positive things driving our economy at present that I just mentioned would have to deteriorate a lot. And that is something I don't think anyone would wish for.