Danish mortgage costs in negative territory

Brexit feeds capital flight into safe-haven markets including AAA-rated Denmark

COPENHAGEN • Danish households are being paid to borrow, with interest on floating-rate loans sinking to the lowest on record, as Britain's decision to quit the European Union (EU) feeds a capital flight into markets considered safe.

Since the world woke up to the reality of Britain having voted itself out of the EU last week, investors have mostly piled into assets sold out of Japan and Switzerland.

But AAA-rated Denmark, which pegs its krone to the euro, has also felt the weight of a sudden capital influx, sending its 10-year government yield close to zero and driving down rates on home loans.

Denmark's mortgage banks are resetting interest on loans tied to money market rates, and those have plunged. The result, said economist Lise Bergmann of Nordea Kredit, is thousands of home owners with negative rates. "This means investors will pay home owners to lend them money," she said.

Borrowers' rates are as low as minus 0.31 per cent, a record, Ms Bergmann said. The previous record was minus 0.21 per cent, she said. Though the interest rates are negative, home owners need to pay their lenders a fee, so the overall payment is still positive.

Trader Lars Madsen at Nykredit points out that the Copenhagen interbank offered rate is now about 7 to 8 basis points lower than it was before the June 23 referendum.

  • -0.31%

  • Borrowers' rates at record low

"My guess is that the coupons will be the lowest," he said.

The fallout from last week's Brexit vote is being felt across maturities in Denmark's US$450 billion (S$611 billion) mortgage bond market. Yields on non-callable short-term bullet bonds (maturing in the next few years) are sinking even further into negative territory after some fell below zero in April.

The bonds, which make up about 46 per cent of the market, are used to fund loans with rates that change every one to five years. Floaters make up 16 per cent of the total while the rest is in fixed-rate loans.

The longest end of the yield curve is also feeling the effect of safe-haven demand.

In Denmark, you can get a 30- year home loan and pay your bank less than the United States government pays its creditors.

Lenders may soon have to begin offering loans with rates of 2 per cent. Mortgage banks in Denmark stop marketing loans when the bonds funding them trade above par on the secondary market. Until recently, lenders were mostly selling 30-year mortgages with coupons of 2.5 per cent.

But the bonds behind them have now climbed above 100. If demand persists and the notes stay above par, lenders will start offering mortgages at 2 per cent and even 1.5 per cent on 30-year maturities. The last time they did that was early last year, after the Swiss central bank abandoned its franc cap.

Rates could even go lower, said Mr Karsten Beltoft, head of the Danish Mortgage Bankers Federation. If the European Central Bank cuts rates to protect the euro zone from the radiation of Brexit, Denmark probably would have to follow.

"At first glance, it's good to be a home owner, but it really is a sign of sickness in the economy," Mr Beltoft said. "That's the flip side to the coin."

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A version of this article appeared in the print edition of The Straits Times on June 29, 2016, with the headline 'Danish mortgage costs in negative territory'. Print Edition | Subscribe