With negative rates, homeowners in Europe are paid to borrow

LISBON — Paula Cristina Santos has a dream mortgage: the bank pays for it.

Its interest rate fluctuates, but right now it’s about minus 0.25%. Thus, each month, Ms. Santos’ lender, Banco BPI SA, deposits interest on the mortgage of 320,000 euros, equivalent to approximately $ 380,000, into her account, which she took out in 2008. In March, she paid received about $ 45. 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 of sovereign debt. The negative rates have helped everyone get cheap financing, from governments to small businesses. It encouraged 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 economic hardship continues in Europe, negative rates persist and they are falling. As a result, more and more borrowers in Portugal as well as 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 estimated in 2019 that 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 people in Portugal, Ms. Santos’s is tied to Euribor, which is based on the cost of borrowing European banks from each other. 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 three-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 carry negative rates. The number of these contracts increased by 50% last year, according to a person familiar with the matter. Ms Santos’ bank, BPI, said it had so far paid € 1 million in interest on mortgage contracts to an undisclosed number of customers.

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, 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,

BBVA 1.40%

one of the largest lenders in Spain.

There are no official figures available on the number of mortgages currently with zero interest rates in Spain. The banks refused to disclose their figures.

In Denmark, more and more borrowers have seen their rates go negative, although in most cases they are still paying their banks because of administrative fees.

There, mortgage loans are not financed directly 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.


What lessons can be drawn from the European experience of negative interest rates? Join the conversation below.

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 increases 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 that we’ve gotten used to them,” Johansen said.

A setback for borrowers receiving interest from their lenders is that banks in Denmark and elsewhere have started charging customers for their deposits, claiming they can no longer absorb the negative rates their central bank charges 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 great to receive interest from her bank, its overall situation is no better as BPI has sharply reduced the interest it was offering on its corporate deposit account these days. past years, to near zero, about 3%. His plans to buy a new home are on hold as 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 the city center, but it’s hard to leave such a great mortgage deal behind,” Ms. Santos said.

The US mortgage market involves some key players who play an important role in the process. Here’s what investors need to understand and what risks they take when investing in the industry. WSJ’s Telis Demos explains. Photo: Getty Images / Martin Barraud

Write to Patricia Kowsmann at [email protected]

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