With negative rates, homeowners in Europe are paid to borrow
LISBON – Paula Cristina Santos has a dream mortgage: the bank pays her.
Its interest rate fluctuates, but right now it’s around minus 0.25%. Thus, each month, Ms. Santos’ lender, Banco BPI SA, deposits interest in her account on the mortgage of 320,000 euros, equivalent to approximately 380,000 dollars, which she contracted in 2008. In March, she paid collected about 45 dollars. She still pays the principal of the loan.
Ms Santos’ upside down relationship with her lender began years ago when the European Central Bank cut interest rates below zero to revive the continent’s fragile economy amid a crisis in the sovereign debt. Negative rates have helped everyone get cheap financing from governments to small businesses. This has prompted households to borrow and spend. And he broke the basic rule of credit, allowing banks to owe borrowers money.
Ms. Santos’ case was supposed to be rare and almost over now. After the ECB cut interest rates below zero in 2014, eurozone economies improved and expectations were that rates would rise in a few years. But the coronavirus pandemic has changed all that.
As the economic suffering in Europe drags on, negative rates remain – and they are falling. As a result, more borrowers in Portugal as well as in Denmark, where interest rates turned negative in 2012, find themselves in the unusual situation of receiving interest on their loans.
“When I took out the mortgage, I never imagined this scenario, and neither did the bank,” said Ms. Santos, a 44-year-old business consultant.
Deco, a Lisbon-based consumer rights group that in 2019 estimated rates turned negative on more than 30,000 mortgage contracts in Portugal, said the figure has likely more than doubled since then.
Many European borrowers have variable rate mortgages tied to benchmark interest rates. Like most in Portugal, Ms. Santos’s is linked to Euribor, which is based on the cost of borrowing between European banks. It pays a fixed rate of 0.29% in addition to the three-month Euribor rate. When she took out the mortgage in 2008, the 3-month Euribor was close to 5%. It has declined in recent months and is now near a record low, at minus 0.54%.
Portuguese state-owned company Caixa Geral de Depósitos SA said around 12% of its mortgage contracts currently have negative rates. The number of such contracts increased by 50% last year, according to a person familiar with the situation. Ms Santos’ bank, BPI, said it had so far paid € 1 million in interest on mortgage contracts to an undisclosed number of clients.
Spain, where most mortgages are also linked to Euribor, faced a similar situation. But the country has passed a law that prevents rates from dropping below zero. Portugal did the opposite by passing a bill in 2018 that requires banks to reflect negative rates.
“In the event that the fall in interest rates exceeds the mortgage spread, the client would not pay interest, but under no circumstances [would the bank] pay in favor of the borrower, ”said a spokesperson for Banco Bilbao Vizcaya Argentaria HER,
one of the largest lenders in Spain.
There are no official figures available on the number of mortgages currently carrying zero interest in Spain. The banks refused to disclose their figures.
In Denmark, more borrowers have seen their rates turn negative, although in most cases they continue to pay their banks due to administrative fees.
There, the mortgages are not directly financed by the banks, which do not set the conditions. Instead, they serve as a type of intermediary, selling bonds to investors at a specific rate, lending the same amount to the borrower for the same rate.
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Nykredit, Denmark’s largest mortgage lender, said more than 50% of its loans with an interest period of up to 10 years have a negative interest rate before fees. This proportion is increasing because mortgage rates tend to be adjusted every few years.
This is the case of Claus Johansen, 41, who works in the mortgage department of Nykredit. In 2016, he took out a five-year variable rate mortgage for DKK 1.2 million, or about $ 190,000, to buy a house north of Copenhagen. Its interest repayments for the first five years were set at 0.06%. In January of this year, the rate was revised to minus 0.26%, which is subtracted from the 0.6% administration fee he has to pay to the bank.
“It’s strange, but negative rates have been around for so many years, we’ve gotten used to them,” Johansen said.
A setback for borrowers who receive interest from their lenders is that banks in Denmark and elsewhere began charging their customers for their deposits, claiming they could no longer absorb the negative rates their central bank was charging them. Mr Johansen said he was keeping his account balance below the threshold at which his bank would start charging him.
In Lisbon, Ms Santos said that while it is good to receive interest from her bank, its overall situation is not better because BPI has sharply reduced the interest it was offering on its business deposit account these days. past years, to near zero, about 3%. His plans to buy a new home are on hold because BPI now charges a much higher spread on new mortgages, to avoid falling back into the negative rate trap.
“We wanted to get out of downtown, but it’s hard to leave such a great mortgage deal behind,” Ms. Santos said.
Write to Patricia Kowsmann at [email protected]
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