Negative Interest Rate From Denmark's Jyske Bank Could Be Start Of Trend

A Danish bank is offering mortgages with negative interest rates , which means customers can get paid for buying real estate on borrowed money.

Jyske Bank , the third-largest independent bank in Denmark , announced last week that prospective homebuyers can take a 10-year fixed-rate mortgage with an interest rate of minus-0.5 per cent . 

So why would a bank pay someone to borrow money from them? It comes down to being competitive in a marketplace where interest rates have been hovering around zero for some time now.  

Basically, the way it works is the negative interest rate will act as a subsidy towards the repayment, and the repayment portion will go down as the debt is paid off, usually in monthly or biweekly installments. The debt is eventually paid off, but customers end up paying slightly less than what was originally owed. 

The move incentivizes prospective buyers to keep investing in real estate by borrowing at a time when money is as cheap as it’s ever been in Denmark.

At the end of the day, financial institutions are still in the business of making money, and negative interest rates can help them do that in certain scenarios.

For example, if a bank can borrow money from a central bank at a minus-1 per cent interest rate, and they are lending to a customer at minus 0.5 per cent, they are still making a 0.5 per cent profit margin. Banks keep the difference to make money, and over a period of 10 years or longer, that can really add up. 

Also, customers will have to pay additional fees associated with their account. 

“It’s another chapter in the history of the mortgage,” Jyske Bank housing economist Mikkel Høegh told Denmark’s TV 2, as reported by The Cophenhagen Post . “A few months ago, we would have said that this would not be possible, but we have been surprised time and time again, and this opens up a new opportunity for homeowners.”

Watch: Here’s why strong economies spell bad news for mortgage rates. Story continues below.

Last Wednesday, Bloomberg reported Finland’s Nordea Bank Abp said it would be offering 20-year fixed mortgage rates in Denmark that don’t charge any interest, and 30-year rates are also available at 0.5 per cent interest. 

So will negative interest rates eventually make their way to Canada? It’s certainly possible , especially if the Bank of Canada moves its lending rate into negative territory. 

For that to happen, the Canadian economy would likely have to see a slowdown in inflation, which would push the Bank of Canada to lower its key interest rate. That typically happens when the economy slows down. In that scenario, it would be easier to rack up debt — and harder to imagine an economy without it.