Brexit Shock Leads to Record Negative Mortgage Rates in Denmark

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Danish households are being paid to borrow, with rates on floating-rate loans sinking to the lowest on record, as Britain’s decision to quit the European Union 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.

The country’s mortgage banks are in the process of resetting interest on loans tied to money market rates, and those have plunged. The result: “thousands of homeowners will have negative rates,” said Lise Bergmann, an economist at Nordea Kredit in Copenhagen. “This means that investors will pay homeowners to lend them money.”

Borrowers’ rates are as low as minus 0.31 percent, a record, Bergmann said in a note. The previous record was minus 0.21 percent, she said. Though the interest rates are negative, homeowners need to pay their lenders a fee, so the overall payment is still positive.

Lars Madsen, a trader at Nykredit’s funding department, points out that the Copenhagen interbank offered rate is now about 7-8 basis points lower than it was before the June 23 referendum. “My guess is that the coupons will be the lowest,” he said. “It’s definitely back to the lowest levels.”

The fallout of last week’s so-called Brexit is being felt across maturities in Denmark’s $450 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 already in April. The bonds, which account for about 46 percent of the market, are used to fund loans with rates that change every one to five years. Floaters make up 16 percent 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 U.S. government pays its creditors.

Lenders may soon have to begin offering loans with rates of 2 percent. 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 percent.

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 percent and even 1.5 percent on 30 year maturities. The last time they did that was in early 2015, after the Swiss central bank abandoned its franc cap.

“Britain’s exit from the EU has resulted in higher prices for especially fixed-rate loans,” BRFkredit, the mortgage arm of Jyske Bank, said in a note. “Especially the 2 percent, 30-year looks attractive now.”

Rates could even go lower, according to 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, he said by phone.

“At first glance, it’s good to be a homeowner, but it really is a sign of sickness in the economy,” Beltoft said. “That’s the flip side to the coin.”

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