It’s not a negative rate mortgage, it’s an Orwellian mortgage

Some brouhaha around this in Denmark:

Jyske Realkredit is ready with a fixed-rate mortgage with a nominal interest rate of minus 0.5%.

Yes, you read right. You can now get a fixed-rate mortgage with a maturity of up to 10 years, where the nominal interest rate is negative. However, you are not exactly going to make money borrowing. Namely, there must also be paid, among other things, establishment fees and contributions, and there will be a loss of prices.

“In practical terms, it will be experienced that the mortgage loan repayment will be greater than it would be with a positive interest rate. The negative interest rate will act as a ‘subsidy’ to the repayment. And the repayment portion will become smaller and smaller as the debt is reduced,” housing economist Mikkel Høegh.

How is that possible?

“Yes, I almost don’t understand it either. In fact, I said it can’t be said. But we have figured out the extremes well, and it may very well be possible to have a bond rate of minus,” explains Jyske Bank’s home economist.

It is about there is repayment on such a loan and when the interest rate is negative then the repayment on the loan will be increased. It is increasing the withdrawal of the bond rather than sending money to the investor.

If you read in old rainbooks, which most people have come across either at the banking school, university or another good place, then this is almost absurd. Maybe you should sit down and write a new and modern textbook with some examples that correspond to the present, “says Mikkel Høegh.

Obtained additional loan

Due to the maturity, the loan is an obvious additional loan. Due to the cost of borrowing, the loan must be up to a certain size (at least 200,000) in order for it to pay off. The loan is not available with interest free.

Examples of what the additional loan can be used for:

  • Home Improvements
    Need New Kitchen, Bathroom, Garage or Other? If you have a value in your home, a fixed-rate loan with -0.5% can be used. at face value be an obvious additional loan to fund your home improvements.
  • Mortgage loans as car loans
    If you have a value in your home, a fixed-rate loan with -0.5% can be used. At par, interest rates are a particularly attractive alternative to other car loans on the market. There is no down payment requirement when you finance the car with a mortgage. We recommend that you choose a maturity on the mortgage that roughly matches the life of the car.
  • Collect your loans
    If you still need to take out an additional loan , consider whether you have other expensive debt. If you have enough free value, you may be able to save money by taking out a larger additional loan and paying off the expensive loans. This way, you collect your debt without the large additional costs, as this happens in connection with the fact that you already take out an additional loan.

There are many options and what you want to use the additional loan on is up to you. If you would like to hear more about your loan options, you are welcome to contact your advisor  or our customer service center at 89 89 89 89 .


It costs to borrow DKK 250,000 with minus 0.5 per cent. at face value

10-year fixed-rate loan with installment from Jyske Realkredit A / S with a total credit amount / disbursement of DKK 250,000, 40 quarterly installments. A debt rate, fixed, of -0.50%, a variable contribution rate of 1.00% at 60-80% mortgages and a pre-tax APR, 2.11%. Principal of DKK 269,127 incl. price loss at a rate of 97.55 and price cut at disbursement, grant fee, brokerage and registration tax to the state. First year average benefit before tax, DKK 2,410 / month. Total repayments before tax DKK 277,392 – of which total interest and contributions DKK 8,264 changes in the exchange rate will affect the size of the amount paid out. Claims for fire insurance of the mortgaged property.

7-year fixed-rate loan with installments from Jyske Realkredit A / S with a total credit amount / disbursement of DKK 250,000, 28 quarterly installments. A debt rate, fixed, of -0.50%, a variable contribution rate of 1.00% at 60-80% mortgages and a pre-tax APR, 2.72%. Principal of DKK 269,127 incl. price loss at a rate of 97.55 and price cut at disbursement, grant fee, brokerage and registration tax to the state. First year average benefit before tax, DKK 3,370 / month. Total repayments before tax DKK 274,937 – of which total interest and contributions DKK 5,809 Changes in the exchange rate will affect the size of the amount paid out. Claims for fire insurance of the mortgaged property.

Runningtime
Nominal interest rate
proceeds
principal
Monthly post-tax benefit *
7 years -0.50% 250000 269127 3331
Ten years -0.50% 250000 269127 2374

* Tax rate 25.6 per cent.


It costs to borrow DKK 500,000 with minus 0.5 per cent. at face value

10-year fixed rate loan with installment from Jyske Realkredit A / S with a total credit amount / disbursement of DKK 500,000, 40 quarterly installments. A debt rate, fixed, of -0.50%, a variable contribution rate of 1.00% at 60-80% mortgages and a pre-tax APR, 1.7%. Principal of DKK 529,590 incl. price loss at a rate of 97.55 and price cut at disbursement, grant fee, brokerage and registration tax to the state. First year average benefit before tax, DKK 4,742 / month. Total repayments before tax DKK 543,721 – of which total interest and contributions DKK 14,131 Changes in the exchange rate will affect the size of the amount paid. Claims for fire insurance of the mortgaged property.

7-year fixed rate loan with installment from Jyske Realkredit A / S with a total credit amount / disbursed amount of DKK 500,000, 28 quarterly installments. A debt rate, fixed, of -0.50%, a variable contribution rate of 1.00% at 60-80% mortgages and a pre-tax APR, 2.17%. Principal of DKK 529,590 incl. price loss at a rate of 97.55 and price cut at disbursement, grant fee, brokerage and registration tax to the state. First year average benefit before tax, DKK 6,632 / month. Total repayments before tax DKK 539,571 – of which total interest and contributions DKK 9,979 Changes in the exchange rate will affect the amount of the amount paid. Claims for fire insurance of the mortgaged property.

Runningtime
Nominal interest rate
proceeds
principal
Monthly post-tax benefit *
7 years -0.50% 500000 529590 6555
Ten years -0.50% 500000 529590 4671

* Tax rate 25.6 per cent.


Keep the loan until expiry

Note that, as with all other new series, there is a risk of a so-called lock-in effect. The lock-in effect is that if a bond series is collected in relatively few hands, as a borrower, you cannot be sure of being able to buy the bonds in the market if you want to repay your loan. Instead, the loan must be repaid at rate 100.

It is our recommendation that you keep the loan to maturity, which is why the risk of lock-in effect will not matter. Possibly. lock-in effect will only matter if you need to get out of the loan ahead of time. However, you can always take advantage of the conversion right, which allows you to redeem at exchange rate 100 at term.

Obviously the fees will have to be large to offset the lost interest income for the bank. It’s not a negative rate mortgage, it’s an Orwellian mortgage. It charges just as much only using a different mechanism.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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