With Danish banks heralding the advent of negative mortgage rates, which means that homeowners could be actually paid to borrow money to buy a home, Irish homeowners may understandably be expecting a similar boon here. However, is such optimism misplaced?
Earlier this month, Jyske Bank A/S, Denmark's third-largest lender announced ia mortgage rate of -0.5 per cent, before fees, while fellow Danish bank Nordea Bank Abp, is offering 30-year mortgages at annual interest of 0.5 per cent, and 20-year loans at zero.
So is this the start of something that could eventually benefit Irish homeowners, as the European Central Bank’s quantitative-easing programme continues to make its presence felt on European markets?
Well, perhaps not.
Firstly, the negative rates in Denmark don’t really mean that homeowners are being paid to borrow. In theory, a negative rate of 0.5 per cent should mean that if you buy a house worth €100,000, and pay it back in full after 10 years, then you should only repay the bank €95,000.
In practice however, Danish mortgage rates don’t work the same way as we understand them; as part of their mortgage agreement, borrowers also have to pay fees and charges to their lender, in addition to the interest rate on their loan. This can mean that despite the introduction of negative rates, such borrowers will still end up paying back a little more than they borrowed.
Nonetheless, there is no denying the broader import of the move by the Danish banks; interest rates across Europe – and not just the Euro zone – are on a seemingly inexorable downward trend.
And Irish home owners, likes those across Europe, should reasonably expect to benefit from this trend.
However, given the sharp dichotomy in rates in Ireland and elsewhere across Europe, homeowners shouldn’t expect their bank to be paying them to borrow anytime soon.
The Irish premium
Yes, Irish mortgage rates remain stubbornly higher than those across Europe, due to a combination, perhaps, of weak competition and the difficulties faced by lenders when foreclosing on a property, which means that banks are looking for extra compensation to protect themselves.
So, while Irish corporate depositors are already facing negative rates, and many retail depositors are earning a zero return on their savings, Irish homeowners remain some distance away from negative rates.
This is partly because Irish banks have effectively decoupled their mortgage rates from European norms, which means that Irish homeowners continue to pay over the odds. Average mortgage rates in Ireland, for example, stood at 3.03 per cent in June, second highest in the Euro zone behind Greece.
But across the euro area, the composite home-loan rate fell to 1.65 per cent in June, the lowest since records began in 2000. So rates in Ireland will have to fall faster, and by more, just to catch up with their European neighbours, never mind hit negative rates.
Consider the experience of French borrowers; with ECB rates at zero, and three-month Euribor rates at about -0.4 per cent, banks have progressively passed on interest rate trends to their customers. Recent data from the Bank of France shows that rates hit a low of an average of 1.39 per cent in June, while German mortgage rates also reached historic lows this year. Indeed some lenders are offering rates of around 0.5 per cent to German home owners, according to comparison website Interhyp.
This means that based on these rates, a homeowner with a €250,000 mortgage will have a monthly repayment of €1,058 in Ireland; €850in France and just €747 in Germany. So an Irish homeowner is paying about 20 per cent more each month to service their mortgage than their counterpart in Bordeaux, and about 30 per cent more than someone in Frankfurt.
And these European borrowers are also seeing the monthly burden of their mortgage repayments decline at a faster rate; in Germany, mortgage rates slid by 33 basis points in the year to June 2019, for example. Here in Ireland however, the trend was the same but the order of the decline was a more modest 11 basis points.
For more on mortgage rates, here’s a snapshot of what’s happening around the world.
US
The average American 30-year mortgage rate is 3.6 per cent, the lowest since November 2016. A resulting surge in demand for homes sent total mortgage debt to $9.41 trillion in the second quarter, surpassing the peak reached during the 2008 financial crisis. Mortgage brokers, too, are rushing to keep up with demand for refinancing: Applications are running at a three-year high.
The benefits for home buyers are muted in cities such as New York and San Francisco, however, because the boom has led to a shortage of affordable homes.
France
French mortgage rates reached a trough of 1.39 per cent on average in June, according to Bank of France data. The country’s banking industry is extremely competitive: Many lenders have jockeyed to lure customers with cheaper offers.
Germany
German mortgage rates also reached historic lows this year, with the average 10-year loan currently under 1 per cent. Some lenders are offering rates around 0.5 per cent, according to Interhyp, a comparison website.
The prospect of further declines in benchmark borrowing costs could drive many mortgage rates toward zero. This may have a limited impact on the residential market, however – only 46 per cent of Germans are homeowners, compared with an EU average of 69 per cent.
UK
Mortgage rates in the UK, by contrast, have been almost unchanged this year, despite a drop in overall borrowing costs amid a worsening economic outlook. The rate on a two-year fixed mortgage fell just 8 basis points from January to July, compared with a 38 basis-point drop in two-year swaps.
One reason for this, says Mark Gilbert of Bloomberg Opinion, is that the Bank of England's regulatory arm has discouraged lenders from trying to win market share by easing standards because it's concerned about their financial strength.
Hungary
Mortgage costs are fairly high in Hungary because regulators steered almost all borrowers away from cheaper (but less secure) floating-rate loans. A 10-year fixed-rate mortgage is currently around 5 per cent, compared with money-market rates near zero.
The attraction of security was heightened by memories of a fashion for mortgages taken out in Swiss francs before the financial crisis. The subsequent plunge in the forint against the franc hammered as many as 1 million Hungarians.
Greece
Mortgage rates have actually risen in Greece, burdened by sovereign and corporate debts. The average floating-rate home loan was 3.08 per cent in June, an increase of 11 basis points from a year earlier.
Greek banks’ mountain of soured loans means they have become wary of extending new credit, even when secured by a house.
Hong Kong
Mortgage rates are also climbing in Hong Kong as the political crisis weakens the appetite for loans. Both HSBC Holdings Plc and Standard Chartered Plc increased effective rates by 10 basis points to 2.48 per cent in July, according to Bloomberg Intelligence.
Japan
The Bank of Japan’s negative-rate policy has kept home loans affordable. A 10-year fixed-rate mortgage can be had for about 0.65 per cent, and Sumitomo Mitsui Trust Bank offers a rate as low as 0.53 per cent.
This has spurred property purchases, and prices, in the larger cities, helping reverse years of decline following the bursting of the market bubble in 1991. Residential land prices in the greater Tokyo area rose 1.3 per cent last year, while those outside major urban areas increased 0.2 per cent, the first rebound in 27 years. Nationwide, though, prices stand at just 38 per cent of their 1991 levels, according to the Land Ministry.
Australia
Mortgage rates have fallen about 40 basis points following the Australian central bank’s back-to-back interest-rate cuts in June and July. The average standard variable rate at the nation’s big four lenders is currently 4.94 per cent.
The decline in mortgage rates, along with an easing of lending rules and the surprise re-election of the centre-right government, has fired up Australia’s housing market. Following a two-year slide, property prices in Sydney have risen over the past two months.
South Africa
The cost of a home loan remains relatively high in South Africa. Banks’ prime lending rate is about 10 per cent, and mortgage borrowers can expect to pay anywhere from two percentage points below that rate to five points above it.
While banks are starting to extend more loans to compete for market share, mortgage rates are unlikely to drop much. Inflation is generally high, and the central bank has held its benchmark rate above 6 per cent since 2015.
Nigeria
Nigeria has had double-digit inflation since 2016, with mortgage rates to match – as high as 30 per cent. Those who contribute a small percentage of their income to the state-owned bank can get a much better 9 per cent rate from the National Housing Fund.
Mortgage uptake is low because of high rates, low incomes and a long wait for government-backed loans.
Additional reporting Bloomberg
