A bank in Denmark is now offering borrowers mortgages at a negative interest rate, effectively paying its customers to borrow money for a house purchase.
As reported by the Guardian and others, Jyske Bank – Denmark’s third-largest bank – said this week that customers would now be able to take out a 10-year fixed-rate mortgage with an interest rate of -0.5%, meaning customers can actually pay back less than the amount they borrowed.
To put the -0.5% rate in simple terms: If you bought a house for $1 million and paid off your mortgage in full in 10 years, you would pay the bank back only $995,000.
Oh those crazy, whacky Scandinavians, right?
Well, maybe. Or maybe not.
If the alternative is that the bank doesn’t gain market share, or their lending book dwindles, possibly through a generalised lack of consumer confidence, then it might be that the bank is better off locking in a small loss now, rather than a bigger loss later. Plus there’ll probably be some fees associated with the lending, so they can cover themselves to a degree.
Financial markets are in a volatile, uncertain spot right now. Factors include the US-China trade war, Brexit, problems in Hong Kong, and a whole heap more including a generalised economic slowdown across the world – and particularly in Europe. Some – not all – investors fear a substantial crash in the near future.
So some banks are willing to lend money at negative rates, accepting a small loss rather than risking a bigger loss by failing to lend money at higher rates later on that customers cannot meet. Essentially, lock in your customers now and help them ride out any coming storm.
Banks are probably also betting that some of those 10 year mortgagees will extend their loan or borrow more in the future, as most people tend to return to an existing lender before looking elsewhere.
But as one commentator remarked:
“It’s an uncomfortable thought that there are people who are willing to lend money for 30 years and get just 0.5% in return. It shows how scared investors are of the current situation in the financial markets, and that they expect it to take a very long time before things improve.”
So where’s the good news? Well hyper-low interest rates are putting a floor under housing markets everywhere, and making it possible for some people (such as first home buyers) to get into the market where they couldn’t before. Home renovators will also find it easier to tart up their homes, which will lend useful support to both tradespeople and building products manufacturers.
Overall, we seem to be now firmly in a low-growth economic model, with only China really bucking the trend, and even that biggest of Asian tigers is slowing down a little.
So what does this all mean for business?
- Fight harder than ever for market share.
- Review your pricing to stay competitive.
- Be prepared to run efficiently on lower margins. Even take a loss for a while, if you can, if it means you can outlast your competition.
- Innovate to add value.
- Provide improved customer service.
- And advertise more – not less – to grow your market share.
As for people living on their savings? Good luck. You’re going to need it.
Well, This Is What I Think 