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Interest-Free Mortgages Come To Denmark. Will Trouble Follow?

02/07/2017 04:41 EST | Updated 02/14/2017 02:45 EST

You’ve got to envy the Danish. Or, upon closer inspection, maybe not.

Mortgage rates at Denmark’s two largest lenders have fallen below zero, effectively giving homebuyers there interest-free mortgages.

Danske Bank’s mortgage arm, Realkredit, has dropped its mortgage rate to minus-0.07 per cent, while Nykredit’s mortgage rate has dropped to minus-0.08 per cent, Bloomberg reports.

This doesn’t necessarily mean homebuyers will get paid for holding a mortgage, as there are additional fees homebuyers have to pay lenders. But some Danish borrowers did get paid to take mortgages last year, in the wake of Brexit, which caused interest rates to dip.

isbjerget aarhus

The Isbjerget residential complex in Aarhus, Denmark. (Photo: Villy Fink Isaksen/Creative Commons)

Negative rates make Denmark richer — and more unequal

Denmark has had a negative benchmark deposit rate for nearly five years, the longest of the handful of countries where rates are negative. The rate currently sits at minus-0.65 per cent.

On the surface, it has made the Danes much richer. Residents have seen an “impressive increase in real wages," Tore Stramer, chief economist at Nykredit, told The Independent in January.

That came after news that bank deposits in Denmark are at their highest level in the 16 years the data has been tracked, indicating Danes have more wealth than ever.

nyhavn copenhagen

Pedestrians in Copenhagen's Nyhavn district. (Photo: Getty Images)

But there is a downside to negative rates, and one some economists say could impact many countries — though especially ones with negative rates, such as Denmark, Japan, Sweden and Switzerland. And that is rising inequality.

When interest rates are super-low, it tends to drive up asset prices, making those who already own those assets wealthier. Think of houses: Low mortgage rates make larger mortgages affordable, pushing up house prices. That benefits existing homeowners, but causes future homebuyers to become more indebted.

A recent study from Denmark’s Economic Council found inequality had risen noticeably in the country since 1990. It noted that, since 2008, when interest rates started coming down, income from capital (such as rental housing and investments) rose relative to income from wages — a clear sign the wealthy are particularly benefiting from low rates.

biking people

Cycling commuters in Copenhagen's old town. (Photo: Michal Krakowiak/Getty Images)

A soaring housing market

Some observers worry the Danish could be hit especially hard if and when interest rates begin to rise.

Property prices have soared since interest rates went negative, growing 40 to 60 per cent in Copenhagen in the first three years of the country’s negative rate policy.

“To be concrete, there is a danger that Danes go blind to the risk of rates ever rising again,” Stramer told Bloomberg last year. “That raises the risk of a major housing price decline, when rates at some point or other start to rise again.”

So while Danes may be enjoying free mortgages today, they may end up paying for them in the future, in the form of lower house prices.

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