What happens when mortgage interest-rates fall to 0%?

A feature of the credit crunch era has been the way that in the end monetary policy has come down to two things. Pumping up the housing market and house prices in particular ( The Wealth Effects! The Wealth Effects!) and more recently financing government borrowing. Both conveniently support The Precious via the way that asset prices are driven higher in this instance house and bond prices. There has been news on that front this week from Denmark.

The country with the longest history of negative central bank rates is offering homeowners 20-year loans at a fixed interest rate of zero.

Customers at the Danish home-finance unit of Nordea Bank Abp can, as of Tuesday, get the mortgages, which will carry a lower coupon than benchmark U.S. 10-year Treasuries. ( Bloomberg)

For newer readers who may be wondering why Denmark? Well Bloomberg gets to that as well.

Denmark stands out in a global context as the country to have lived with negative central bank rates longer than any other. Back in 2012, policy makers drove their main rate below zero to defend the krone’s peg to the euro. Since then, Danish homeowners have enjoyed continuous slides in borrowing costs.

So in the round we return to part of yesterday’s theme as the monetary push from the European Central Bank is the same as a super massive black hole which via the pegged exchange rate sucks Denmark along with it. This led it down an odd road back last March.

Effective from 20 March 2020, Danmarks Nationalbank’s interest rate on certificates of deposit is increased by 0.15 percentage point. The monetary policy spread to the euro area is thereby narrowed from -0.25 to -0.10 percentage points, remaining lower than the rate in the euro area. In the context of Denmark’s fixed exchange rate policy, the interest rate increase follows Danmarks Nationalbank’s sale of foreign exchange in the market. ( Nationalbanken)

The increase to -0.6% came about because of pressure on the Kroner.

 it was caused by Danish institutional investors selling kroner in response to a decline in the value of their foreign

There is now something of a swerve because in the past an increase in the official interest-rate would raise mortgage rates but as central banks learnt early in the credit crunch the world was spun on its axis a bit.

Homeowners have increased their fixed-rate mortgage loans significantly in recent years. During the
last 12 months, new fixed-rate mortgage loans of kr.
134.7 billion have been disbursed.

That was from the Nationalbanken at the end of last September and there is more below.

More than half of the Danish homeowners’ total
mortgage loans of kr. 1,712 billion is now again with
a fixed interest rate, more precisely kr. 856.6 billion.
The last time fixed-rate loans accounted for more
than half of the loans, was in 2009. The lowest level
was in 2012 with just 31.5 per cent.

So we see that the interest-rate cut into the icy world of negative rates back in 2012 probably had an impact because of the predominance of variable rates back then, but now for the reason below fixed-rates have become more popular.

The appetite for fixed-rate loans has increased in line
with the declining interest rate, differentiated administration fees, and the narrowed gap to the variable
interest rate.

The actual market

If we go to Finance Denmark we see that whilst interest-rates have been trending lower there is still quite a gap between short and long ones. For example the short bond mortgage rate is -0.55% and the long bond mortgage rate is 0.94%. But the gap has been narrowing as the long bond rate was over 3% in 2015 whereas the short one went negative then.

What about mortgage borrowing?

This has done this according to the Nationalbanken.

The Danes’ total mortgage debt has grown by 4.0
per cent in the past year, and the debt has increased
in 91 of 98 municipalities. The largest lending growth
is in Glostrup with 7.3 per cent.

The borrowing rise in new terms will be higher because some have chosen to repay more.

In the last four quarters, households have increased
the repayments on their mortgage loans by kr. 998
on average per borrowed million……..The Danes have repaid kr. 6.0 billion on fixed-rate loans in 3rd quarter 2020, while the repayments on variable-rate loans were kr. 4.4 billion……… They have so far repaid kr. 30.8 billion in

So as so often we see two different behaviours. Some are borrowing more but others are using this as an opportunity to repay. So greed and fear are co-existing.

House Prices

The official data gives us a clue but not a lot more. The latest reading is for the second quarter of last year and it was rising ever since it was set at 100 in 2015 to 120.4.We can set another benchmark I guess as the index had fallen to 85.7 as 2012 began and Denmark prepared for negative interest-rates.

There is a monthly price index for single family houses which showed at annual rate of increase of 4.6% in September which is quite a rise from the -0.2% of March as the pandemic hit.

As to the overall situation prices are now much higher than September 2016 when the central bank announced this.

COPENHAGEN (Reuters) – A housing bubble is looming in Copenhagen, inflated by Denmark’s record-low interest rates, the central bank said on Wednesday.


There are other issues here and those of you with a sense of deja vu may be thinking of June 14th 2016.

Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner…. Realkrdit Denmark, one of the nation’s largest home lenders, provided 758 borrowers with negative interest-rates last year.

That is when we on here first covered negative mortgage rates in Denmark. Or maybe you are thinking of August 2019 and this?

In the world’s biggest covered-bond market, a Danish bank says it’s now ready to sell 10-year mortgage-backed notes at a negative coupon for the first time

Actually I noted this back then.

Since then things have taken a further step as Nordea has started offering some mortgage bonds for twenty years at 0%,

So we can say that whilst we need care as there are often admin fees on mortgages which mean the headlines are misleading that 0% mortgage rates lead to higher house prices. They are also associated with more debt.

However, over the past four decades,
debt has increased significantly faster than incomes
and today accounts for 260 per cent of the disposable
income of Danish households ( Nationalbanken)

Whilst some are repaying as we observed earlier others seem much less keen.

At the end of 3rd
quarter of 2020, 59.8 per cent of the variable-rate
loans are, however, interests-only.

Also they borrow for a long time in the mortgage market.

Long remaining maturity is a particular characteristic
on Danes’ mortgage debt. At the end of the 3rd
quarter of 2020, the remaining maturity of 59.9 per
cent of all Danes’ mortgage debt was between 25
and 30 years. Approximately half of the outstanding
debt is in the form of 30-year loans disbursed within
the past year, either as new loans or as refinancing
of existing loans to new loans with 30-year maturities. ( Nationalbankem)

I remember another country which went down that road as we mull whether Denmark is catching the vapors.

I’m turning Japanese
I think I’m turning Japanese
I really think so


20 thoughts on “What happens when mortgage interest-rates fall to 0%?

  1. Shaun, is this a trick question? Well of course if money is priced at zero then assets are priced at infinity, homes as well.
    Its a nirvana… except for anyone who does not have one.

    • indeed , beholden to a landlord or be one

      As I said a while back , push the pension companies into property , after all bonds are a looser’s game ……..


    • Not necessarily !

      There is always a limit to where assets such as housing will rise to and most mortgages tend to be shorter terms these days so the buyer can switch.

      The lenders however can make their money on their margins so a zero mortgage rate may make a small difference to lenders profits, going forward their profits can be protected.

      As Shaun has probably gathered I have been saying for a while now interest rates will probably fall soon to zero in the UK soon and possibly as early as this month.

      The UK needs to get ahead of the curve here unemployment will start to rise now, in particular I cannot Debenhams being bought out now we are in lockdown now and thousands of jobs will be lost from them alone. ARCADIA will probably suffer the same fate, NEXT wants a stake in the business but its the brands they are after not the stores.

      We have to accept we are in low interest rate environment now and get used to it.

      On the other end of the scale is there will be some concern from people who aren’t getting a return on their money on deposit but these are the risks we take in life nothing is guaranteed apart from death, at some stage we will all die and we cannot take anything with us !

  2. Hello Shaun,

    so if that happens here who is going to stop people borrowing 100’s thusands of pounds but not buying a house but buying gold or bitcoins . As the actual payments will be zero or less, then these “savings” or “assets” will rise . Quite a lot in cases .

    I guess the restrictions will be that they are set against property . But then doesn’t that make this a subsidy ? even for the lender ?

    Arent there rules about this? oh sorry I forgot , they’ll move the goal posts again.

    I don’t think this will frighten the horses at a few tenths of a percent but these things can run away …. -3 % ? why not -15% ?

    temprary of course ……. ( aahahahahaha)

    Absolutley fascinating , is this a farce yet?


    • forbin

      Its all about margins and fees the latter which I failed to mention in my previous post tp Paul C.

      No one has yet reduced to below -1% yet and rates could indeed fall to -2% -3% but no banks got the appetite for that yet.

      Only Denmark giving so low rates on mortgages despite negative rates in a number of countries.

  3. Low interest rates already appear to be having an impact on the Footsie 100 which is currently up 3.58% and this is despite a lockodown and the economy due to contract.

      • yah but only if you have a job or something with income to borrow against. Then why not borrow , you’re right . Borrow x hundred of thousands and so long as you can afford the interest payment the capital will decline. Or better still lend me 500K and pay me to pay it off….. er…. when did we pass into this alt reality ?

        soon ?

        I actually suspect it will be reserved in the UK for certain TBTF Banks and HMG itself ….. typical


  4. Along the way someone is losing? Who is it? Me I suspect as a saver and asset holder (sic).
    Is it all still based on the premise that our children will pay the bill after we are gone (I am 70)?
    Over a year ago now but I saw two guys on the tube at 06:30. Ragged jeans hoodies, but bags of tools – a plumber and a carpenter. 20 somethings. I want those two paying my pension until I go. Trouble is that I can’t choose.
    My answer is that despite the illusion of plenty of provision for such later life as I might have, my investments that might count are still in myself and that after a number of years of stopping working 10 hours a day every day I need to prepare for a return to that. I do have a WWW (wife wot works) but she is an Offsted inspector so not much income there at the moment.
    Even then I quote Macmillan – you’ve never had it so good.
    Need to find a way to put something back in rather than continually taking out.
    Is that the answer to our econmic woes?

    Chris Rick

    • Hi Chris
      There is a lot going on.Much productive work has been stopped and I know quite a few people who do not qualify for the self-employment money. For some times are hard.

      Indeed some do not want people to work and the tweet below caught my eye because that is the Chelsea side of Chelsea Bridge and I place where I sometimes cross to work. or rather I did and plan to again in time.

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