Photographer: Freya Ingrid Morales/Bloomberg

Danske Bank Says Extreme Negative Rates Changing How We Think

The mortgage unit of Denmark’s biggest bank says there’s a risk customers are becoming “blind” to the possibility that interest rates will ever return to normal levels after four years of life below zero.

Realkredit Danmark, the home-finance arm of Danske Bank A/S, is raising fees in an effort to prevent more customers from taking on adjustable-rate loans that require frequent refinancing. A shift toward fixed-rate mortgages that had begun in 2010 has started to reverse, threatening to undermine Danske’s efforts to reduce refinancing risks.

Denmark’s benchmark rate is minus 0.65% after a 10 BP hike in January.

“In the two more recent refinancing auctions the flow has been reversed,” Carsten Noeddebo, chief executive officer of the bank’s mortgage unit, said in a phone interview. “If that continues, we won’t reach our goal.” He says the shift in direction is “probably connected to the very low interest rates” in Denmark.

Denmark’s central bank first drove its main interest rate below zero in July 2012, when Greece’s debt crisis fanned demand for the very safest assets. The AAA-rated country uses monetary policy to defend the krone’s peg to the euro, forcing it to resort to unprecedented stimulus measures to keep up with the European Central Bank. Most forecasters tracking Danish rates don’t expect policy to turn positive until 2018 at the earliest.

QuickTake Negative Interest Rates

After such a long period of negative interest rates, the question becomes whether households will feel immune to the possibility of higher borrowing costs.

“We all need to be careful that we don’t go blind” to the risk, Noeddebo said. “We’ve had a period with very low rates and it’s not a given that it will last.”

For a May 19 story on Denmark’s negative rate experiment, click here.

“There’s no doubt people eventually will go blind to the possibility of rates changing in the future,” Steen Bocian, chief economist at the Danish Chamber of Commerce, said by phone. “I guess it’s already happened; just look at apartment prices in Copenhagen.”

Prices of apartments jumped 8.3 percent in April from a year earlier, according to Danske Bank’s real estate arm, Home, having risen steadily since rates first went negative in 2012.

“We already have property prices which have been pushed insanely high,” Bocian said. “I’m not sure it’s a bubble, but that doesn’t really matter if rates rise in five years, or sooner. Property markets in Copenhagen and the other major cities could be facing a substantial hit.”

Realkredit Danmark is raising the fees it charges for mortgages backed by bonds that need to be refinanced every one to four years. The decision will help it comply with a regulatory requirement that no more than 12.5 percent of a bank’s loan book can be refinanced in a single quarter with a maximum of 25 percent over a whole year, according to Danske Bank analyst Jan Weber Oestergaard.

Realkredit Danmark’s decision to raise fees follows a similar move earlier in the year by Nykredit Realkredit, the country’s biggest mortgage bank, to do the same. Danske’s Oestergaard says other mortgage institutions in Denmark are likely to follow.

For now, there’s little indication that mortgage holders need to fear higher rates. A Nykredit auction on Wednesday offered rates as low as 0.13 percent on mortgages backed by one-year loans. Borrowers refinancing every five years would have to pay 0.48 percent, the second-lowest rate for that maturity on record.

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