Can Home Loan Rates Be Negative Or Benign?

Where property prices appreciate at a higher pace than the interest portion adding to the loans, the borrowers care less about the interest rate levels and borrow at even higher costs. Ultimately, it is the value and appreciation that borrower desire and safety and sustainability that the lenders desire. Be that as it may, government has scope to facilitate lower home loan interest rates with a budgetary subvention thereby commercially supporting the lenders and economically supporting the home loan borrowers

Negative interest rates have always been a puzzle in corporate finance discipline. They are now back in discussion for a logical reason. It was in June 2019, the negative Interest Rate Mortgage loans were discussed widely as Jyske Bank, the Denmark’s 3rd largest Bank, initiated a -0.50% fixed rate 10-years tenured home-purchase loans to retail borrowers. That lending program involved $10 billion and was completed in August 2019.

Historically, these are not the only negative interest rate bearing transactions. After the advent of interest rate banking regime, which is civilized banking, for the first time Switzerland implemented negative interest rates. This was from years 1972 to 1978. The objective was to disincentivize the flood of the foreign currencies into Switzerland. After three decades, in year 2009 Sweden implemented negative interest rates. In year 2012, Denmark implemented negative interest rates on commercial bank deposits. In year 2014, European Central Bank adopted negative interest rate policy. In year 2016, Bank of Japan adopted negative interest rates. For a long time, Japan had very low and near zero interest rate trend. As the deflationary trend did not reverse, Japan adopted negative interest rates as an ultimate measure.

In formal banking circles -0.75% was the maximum negative interest rate as prevailed in Switzerland. It is not out of the context to note that private markets in Switzerland evidenced negative interest rates up to -3%. But globally in the formal banking space, Jyske Bank has its record unbroken as the only bank to grant negative interest rate home loans. In hindsight these loans were admired over a period as Denmark’s policy interest rate saw reductions in due course. From the long-term average of 3.38% the policy rate gradually decreased to 1.85% by April 2025. Currently, the market guess is interest rates may increase to 2% in due course. Unsurprisingly, the markets grew curious about the status of the outstanding negative interest rate loans and found them performing well.

The negative interest rate instruments were broadly confined to interbank deposits, home loans, and corporate deposits. Particularly the home loans which received such negative interest rate loans had lower loan to value (LTV) ratio. As home property values appreciate gradually, the loan declines and with lower loan portion and higher own margin money, borrowers have no incentive to avoid repayments. The stream of certainty of the repayments from such home loans help the lenders to create a valuable pool and securitize for their further business operations. As money is the raw material and also the end product for the banks, such criss-cross transactions are essential if credit offtake is lower in spite of lower interest rates.

Negative interest rate is banking policy makers’ tool for influencing the savers to spend money rather than save in banks. This is to spur the slow economic activity to pick up pace and grow. Interestingly, negative interest rates did not pinch the savers enough as they are found to continue higher savings with banks. The risk of hoarding cash at homes may have been major reason. In various instances, the bank deposits declined but spending has not increased which implies that people withdrew cash from banks to save at homes. This would be more challenging as central bank cannot gauge the circulation, direction, and volume of the currency in the economy.

Currently, the deflationary trends are behind. The inflation levels are in the target range. Monetary policies gained more support from the governments. Liquidity crunch became a recurring issue. Economies are struggling to mobilize funds for their needs. Therefore, the situation manifests positive interest rate regime and may not have scope for Jyske Bank like organizations to repeat the feat of negative interest rate loans.

Occasionally whenever home loan interest rates are reported very low, zero, or negative, the borrowers of high-interest rate regions wonder why their financial markets cannot support them with lower interest rate home loans. This may be possible if the property prices are appreciating at a higher pace than the adding interest portion on the loans. Only then can the lenders remain safer, and the financial markets sustain. Lest sub-prime crisis incidents may recur and trouble the home owners and the entire system.

Where property prices appreciate at a higher pace than the interest portion adding to the loans, the borrowers care less about the interest rate levels and borrow at even higher costs. Ultimately, it is the value and appreciation that borrower desire and safety and sustainability that the lenders desire. Be that as it may, government has scope to facilitate lower home loan interest rates with a budgetary subvention thereby commercially supporting the lenders and economically supporting the home loan borrowers. The money circulation, asset creation, and economic activity can take a higher trajectory if such a support system is introduced. Can we expect it from the governments?

(Writer is an economist and CFO at BEKEM Infra Projects Pvt Ltd, Hyderabad. Views are strictly personal)