Getting hygge with it - Denmark's Jyske Bank offers negative-yielding mortgages for fixed 10-year terms | Mortgages | Discussion forum

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Getting hygge with it - Denmark's Jyske Bank offers negative-yielding mortgages for fixed 10-year terms
August 10, 2019
7:33 am
Doug
British Columbia, Canada
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Story Link: https://www.usatoday.com/story/money/2019/08/09/denmark-jyske-bank-give-negative-interest-rate-buy-home/1965593001/

Denmark's Jyske Bank, based in Copenhagen and the country's third-largest bank (the equivalent of The Bank of Nova Scotia in Canada in terms of placement in market share rankings), is offering qualified homebuyers 10-year fixed rate mortgages at -0.5%. Economists speculate this will encourage homebuyers to buy and fix up older and distressed homes, possibly in economically challenged and rural areas, but the question is, how does that help Jyske Bank? If this lasts more than a few month promotion, over time, the effective average interest rate earned on mortgages will fall dramatically and I just don't see how Jyske Bank can make money at this, especially when you consider Jyske Bank is paying the Danish central bank and/or European Central Bank for the required regulatory deposits it's required to make with central banks based on a percentage of their assets (principally, their loans!).

On the other hand, good for Jyske Bank for doing this as arguably some lending, even lending in which there's no profit, is better than no lending, so they're taking the really long view, I guess, in the sense that by passing on money to borrowers' pocketbooks, they'll stimulate economic growth in a way central banks have failed to do with their financial engineering a.k.a. quantitative easing. sf-cool

Thoughts?

Cheers,
Doug

Footnote: This comes less than a week after the even larger Norse lender, Nordea Bank, offered 20-year fixed rate mortgages at 0%.

August 10, 2019
9:13 am
Yatti420
Canada
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Wowwwwww... Thank god for DJT.

August 10, 2019
10:19 am
Norman1
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No-one is losing any money on the mortgages.

On the financing side, Danish mortgage bonds are now issued with negative interest rates: Bloomberg (August 5, 2019): 10-Year Notes at Negative Coupons Hit Covered-Bond Market.

August 10, 2019
10:38 am
Doug
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Norman1 said
No-one is losing any money on the mortgages.

On the financing side, Danish mortgage bonds are now issued with negative interest rates: Bloomberg (August 5, 2019): 10-Year Notes at Negative Coupons Hit Covered-Bond Market.  

That alone doesn't explain the financing costs of the mortgages, though, Norman. Banks use myriad sources of funding, including GICs. Even in securitization vehicles, such as those, they sell them through institutional and retail channels, with different rates.

The point is, I don't think you can say from one Bloomberg article, to which we don't have access (guess Bloomberg, sadly, wants all its business units to support themselves financially instead of having the Terminal business subsidize the unprofitable ones, including Bloomberg TV!), states that Jyske Bank will make money on these.

In the short term, it's a small base of mortgages, so yes, they will. I'm arguing over the long term, assuming this isn't a short-term gimmick, it's not profitably sustainable. It just isn't.

Cheers,
doug

August 10, 2019
2:03 pm
Norman1
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The Canadian model for funding mortgages does not apply in Denmark.

The Bloomberg article I mentioned notes that bank mortgage lenders there act as brokers and guarantor than principal. Interest rate of the funding bonds is passed through to the mortgage borrowers. So, if the funding mortgage bond has a rate of -½%, then the matching mortgage also has a rate of -½%.

The Danish bank mortgage lenders make their money charging separate loan administration fees and bond issuing fees.

Danish Cadastre Office: Property formation in the Nordic countries refers to an English-translated report Property formation in the Nordic countries - Denmark. Pages 62 to 63 of the report provides an example transaction and the following details:

The interest and principal repayments made by the borrower on his mortgage credit loan correspond precisely to the interest and principal the mortgage credit institution has to pay to the bond owners. Interest and repayments are made regularly to the bond owners by drawing bonds at par every settlement date so that these are redeemed.

In addition to this the mortgage credit institution demands a charge from the borrower. This is to cover the institution’s administration costs and contributions to reserve funds, i.e. possible losses on other borrowers.54

With a separate charge for admin and lender's reserve fund, the Danish mortgages are not as low as they appear.

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