What Could Negative Interest Rates Mean for Home Buyers?

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Can interest rates go below zero?

The short answer is yes. They can. As a matter of fact, it’s already happened in Denmark, where lenders are offering 0% and negative 0.5% mortgages.

President Donald Trump seems intent on pushing rates in the U.S. to follow that of other European countries, in order to hopefully stave off cyclical economic softening during the upcoming election year.  In recent tweets, the President can be seen pushing the U.S. Federal Reserve to continue to drop interest rates, even though they just had a rate cut back in August, which was the first in a decade of unprecedented low interest rates.

A negative interest rate environment could have a significant impact on consumers.

“INTEREST COST COULD BE BROUGHT WAY DOWN,” Trump tweeted on Wednesday. He continued, “The USA should always be paying the lowest rate.”

Since a negative interest rate scenario has not really played out in the American financial landscape, many homeowners may be wondering how further rate reductions could impact them. How exactly would that work?

“Most people think they’d get money back … but not really,” says Senior Economist George Ratiu of realtor.com®. “A portion of your loan is forgiven each month so you end up paying a little less over the life of the loan.”

Unfortunately, there are drawbacks to this scenario. Even though a homeowner may pay less over the life of the loan, there may be significant fee increases for loan origination and other costs to offset the lost revenue from interest. A lender isn’t going to lend money if there is no profit it in it, so they will find creative ways to make a profit in a negative interest environment.

A negative rate environment could also give a boost to potential home buyers around the margins – the ones who currently might have a little trouble qualifying for a loan due to lower incomes or excessive debt. As debt service payments go down, it could give them some wriggle room to get qualified for a mortgage. This would be good news for sellers, as it may bring more buyers into the market.

For buyers with higher incomes, they may be able to afford bigger homes, as the monthly payments are reduced by the negative interest rate.

Last month, Jyske Bank in Denmark, offered  10-year mortgages with a negative 0.5% interest rate – meaning borrowers would pay less than they owed over the life of the loan. Another Danish bank, Nordea, will offer a 20-year fixed-rate mortgage at 0% interest; a longer, 30-year fixed mortgage will have 0.5% APR.

Another possible drawback to the negative interest rate environment would be that consumers will have little incentive to save money. Deposit accounts, already hovering below 1% interest at traditional brick-and-mortar banks, would earn no interest at all. Consumers may essentially be paying the banks to hold their money, due to increased fees to offset the lost revenue.

Retirees who may depend on interest payments to supplement their social security could be particularly affected, which may mean they will have to look at riskier, dividend-paying stocks, rather than their traditional interest-driven investment vehicles.

Even though a negative interest rate environment may be a boon for business, in the form of lower borrowing costs, for investors, they may see any pickup in the stock market eaten away by higher brokerage fees.

Brokerage firms make their money in two major ways: commissions on trades, and the difference between the interest they have to pay on cash balances and the interest they charge for margin interest (also known as “borrowing on margin”). If margin rates dip due to a negative interest rate situation, then account fees and other service fees may increase as profits get squeezed. This has the potential to dampen market participation by small investors and those investing for retirement and for other goals, such as purchasing a home.

There is no crystal ball that will tell us if a negative interest rate situation will occur. So far, the Federal Reserve has resisted politically-motivated treatises, but if the economic outlook justifies further rate cuts, we may find ourselves in an unprecedented situation in the U.S. Only time will tell how it will play out. The Fed next meets on September 17, and they have signaled the potential for a 1/4-point rate cut at that time. President Trump wants a 1% rate cut.

Let my team at Keystone Realtors® meet all your real estate needs. We can help you find the perfect investment property to get started, and provide advice on your investing journey. Paul Phangureh has over 16 years of experience in buying and selling in the Santa Clara and San Mateo County areas, specializing in the high-end, luxury market, as well as commercial and multi-use real estate. We can help you navigate the process of getting started with real estate investment. Visit our website at Keystonesv.com for listings and information. You can contact Paul at 650-924-2544, or email at paul@keystonesv.com.