Will your mortgage lender end up paying you?
Negative mortgage rates are a strange phenomenon where the lender pays the borrower, not the other way around.
At first this seems ridiculous. Lenders want something for the use of their money. But not always.
A Danish bank called Jyske Bank is offering a mortgage that pays the borrower.
“Jyske Realkredit is ready with a fixed-rate mortgage with a nominal interest rate of minus 0.5%,” says the bank.
“Yes, you read right,” it continues. “You can now get a fixed-rate mortgage with a maturity of up to 10 years, where the nominal interest rate is negative.” (Of course, the bank warns, there will be fees, so you may not actually get a return.)
The question U.S. borrowers are wondering is, are negative mortgage rates coming to our shores?
The Mortgage Reports predicted 3% rates. That happened. Then we forecasted 2% rates. Now, the 15-year fixed is on the cusp of breaking into the 2s, at just 3.05% as of August 8, 2019. Will negative rates be next?
We’re not predicting that yet, but negative rates reinforce the fact that rates still have room to drop despite a precipitous fall so far this year.
Can there really be negative mortgage rates?
At first the Danish example seems like nothing more than pay-to-play financing. Instead of “interest” the borrower pays fees upfront. However, the concept of negative rates is very real.
Throw in a few trade wars, add a couple of downturns abroad, don’t foget Brexit, and it’s possible that negative rates might show up in the U.S.
“It is no longer absurd to think that the nominal yield on U.S. Treasury securities could go negative,” said Joachim Fels this month. Fels is the Global Economic Advisor with PIMCO, one of the world’s largest fixed-income investment managers.
This is important because 10-year Treasury securities and mortgage rates are closely aligned.
Many bonds worldwide already carry negative interest rates
“Last week the German 30-year government bond yield dipped into negative territory for the first time ever,” said Fels. “Around $14 trillion of outstanding bonds worldwide, or 25% of the market, now trade at negative yields, according to Bloomberg. What was once viewed as a short-term aberration — that creditors are paying debtors for taking their money — has already become commonplace in developed markets outside of the U.S.”
25% of the worldwide bond market now trades at negative yields.
Fels adds that “whenever the world economy next goes into hibernation, U.S. Treasuries…may be no exception to the negative yield phenomenon. And if trade tensions keep escalating, bond markets may move in that direction faster than many investors think.”
As this is written 10-year treasury bills in Japan are priced at minus 0.223%. The overnight borrowing rate for banks through the European Central Bank is minus 0.40%. The Riksbank – Sweden’s Central bank – has a minus 1.0% deposit rate for banks.
In Germany, the yield for 10-year bonds is minus 0.58%. Barrons reports that Central banks in New Zealand, Thailand, and India have also just cut their rates. According to the Business Insider it can be argued that the UK, Germany and Italy – the three largest economies in Europe – are already in a recession.
In such an environment moving money to the U.S., with its still-positive interest rates, must look pretty good to many overseas investors.
Why would investors accept a negative return?
Mortgage investors seek both income and the preservation of their capital so why would an investor accept negative rates? Why not just stick the money under a mattress?
“The mattress is not a realistic alternative for storing and handling large amounts of cash,” said Sweden’s Riksbank. “Costs for storage, security and handling imply that the public may be willing to accept a slightly negative interest rate or account fees equivalent to a negative return.”
Getting negative mortgage rates may be a bad option, but it may not be as bad as falling stock and bond prices.
Mattresses aside, the real issue for investors is that alternative investments may be worse. Getting negative mortgage rates may be a bad option, but it may not be as bad as falling stock and bond prices.
The big worry is that interest rates are falling because there’s little demand for capital. That suggests stagnant global growth, something which can impact stock values, employment, and political outcomes.
Can negative mortgage rates come to the U.S.?
If more of that $14 trillion in investor money that is earning negative yields comes to the U.S. there’s a very real possibility that U.S. mortgage rates will fall substantially.
It’s all about supply and demand. If there’s demand for U.S.-based debt at negative rates, then negative rates will become a reality.
Will those negative rates make it to the end mortgage consumer? That’s a tougher sell, though possible. Typically, there are added costs and margins to mortgage rates that make them higher than bond yields.
Still, negative bond rates could drag down consumer mortgage rates to levels not previously thought possible. Thirty-year fixed rates in the 2s are not outside the realm of reality
Should I wait for negative mortgage rates?
Mortgage rates are low, and there’s increasing interest in capturing them while they are here.
It’s quite possible mortgage rates could rise if economic concerns like trade wars and recession subside. Mortgage rate levels 6 to 12 months from now are still anyone’s guess.
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