A Danish bank has launched the world's first negative interest rate mortgage – handing outloans to homeowners where the charge is minus 0.5% a year.
Negative interest rates effectively mean that a bank pays a borrower to take money off theirhands, so they pay back less than they have been loaned.
Jyske Bank, Denmark's third largest, has begun offering borrowers a 10-year deal at -0.5%, while another Danish bank, Nordea, says it will begin offering 20-year fixed-rate deals at 0% and a 30-year mortgage at 0.5%.
Under its negative mortgage, Jyske said borrowers will make a monthly repayment as usual – but the amount still outstanding will be reduced each month by more than the borrower haspaid.
"We don't give you money directly in your hand, but every month your debt is reduced by morethan the amount you pay," said Jyske's housing economist, Mikkel Hegh.
The mortgage is possible because Denmark, as well as Sweden and Switzerland, has seenrates in money markets drop to levels that turn banking upside-down.
Hegh said Jyske Bank is able to go into money markets and borrow from institutionalinvestors at a negative rate, and is simply passing this on to its customers.
But the flipside is that savers will see nothing paid in interest on their deposits – and may alsosuffer as they go negative.
In Switzerland, the bank UBS last week told its wealthy clients that it would introduce a chargeof 0.6% a year if they deposited more than 500,000 euros.
In Denmark, interest rates on savings deposited in Jyske have already fallen to zero. Nowbanks in Denmark are thinking of following Switzerland and moving to negative rates ondeposits.
"Right now, for deposits we don't have a negative interest rate. But discussions are ongoing atthe very highest level. It's just that no bank here wants to be the first mover into negativedeposit rates," said Hegh.
While the Bank of England's base rate is 0.75%, and the European Central Bank's main rate iszero, in Denmark (which is not in the eurozone) the equivalent rate is -0.4%.
In reality, the Jyske mortgage borrower in Denmark is likely to end up paying back a littlemore than they borrowed, as there are still fees and charges to pay to compensate the bankfor arranging the deal, even when the nominal rate is negative.