By 
Negative mortgage rates are an alien concept to most, but analysts at JP Morgan are now asking if the phenomenon could strike America.
They argue central banks are increasingly experimenting with negative interest rates in order to make saving so unattractive that people and businesses spend their cash and boost the economy. President Donald Trump previously asked the Federal Reserve to investigate this and the concept could catch on.
What are negative mortgage rates?
They are home loans with an interest rate of below zero, meaning the lender effectively reduces the balance owed by the borrower every month regardless of repayment amounts.
Why would a bank do that?
Negative-rate home loans happen for one of two reasons. Mortgage rates are influenced either by base rate, which is set by countries’ central banks, or by swap rates, which reflect how much it costs banks to borrow money from one another.
If central banks make base rates negative, or swap rates fall into the red, then banks can borrow for less and then undercut one another trying to win new customers. Competitive pressure would mean banks would eventually take lower margins and offer negative rates to customers.
On a high: How UK mortgage terms have reached an all-time peak
Why would central banks do this?
To give the economy of their country a boost. Negative base rate means high street banks are charged to deposit cash at their countries’ central banks, rather than getting interest on the money as they would do normally.
The idea is to get banks to lend more money out, encouraging the economy to grow. Savings rates would also fall and therefore people and businesses would not be incentivised to store cash and would either spend or invest it.
Do negative-rate mortgages exist?
Just in Denmark. The country’s Jyske Bank has a 10-year mortgage at -0.5pc, while its rival Nordea has a 20-year home loan at 0pc. However, the Danish mortgage system involves fees, meaning customers are not getting the amazing deals they appear to at first glance.
Will negative mortgages come to Britain?
It is unlikely. Britain has never had negative interest rates since the Bank of England started keeping records in 1694.
However, mortgages are extremely cheap. The average two-year home loan with a 40pc deposit is 1.78pc, according to Moneyfacts, the financial analysts. While this may never fall below zero it still represents a good value.
Are there any downsides?
Yes – for savers. If banks apply negative base rates to their savings deals and current accounts, customers are effectively charged to hoard their cash.
Comments