Borrowing money from the bank without paying interest sounds like a pipe dream.
But it’s not in Denmark, where home owners can fix their mortgage at 0 per cent interest for the next two decades.
The Danish home loan arm of Nordic lender Nordea Bank Abp last week became the first bank in the country to offer zero-interest, 20-year fixed mortgages.
And the country’s biggest lender, Danske Bank A/S, said it could soon follow suit.
It comes after an unprecedented move by Denmark’s Jyske Bank in 2019 to provide 10-year fixed loans at a rate of negative 0.5 per cent.
In other words, every month the amount owed on the loan falls by more than the sum of monthly repayments.
So, why is the Scandinavian nation home to mortgages that Australians can only dream of?
Denmark’s fortunes tied to Europe
Monash University economics lecturer Dr Isaac Gross told The New Daily Nordea was able to offer zero-interest, 20-year mortgages to customers because the Danish central bank was essentially paying Nordea to borrow money from them.
This is because the Danish central bank was forced to take interest rates below zero after pegging the nation’s currency to the Euro in a bid to protect its value.
As a result, the central bank’s headline interest rate plunged below zero in 2012 and has oscillated between -0.60 and -0.75 per cent since 2015.
Additionally, Dr Gross said the Danish bank’s willingness to lock in 0 per cent rates for 20 years reflected the pessimistic long-term outlook in European economies.
“The European Central Bank has set interest rates below zero, effectively, which means if you are a bank looking to make money, you can borrow very cheaply, but your ability to lend out at a positive interest rate is severely hampered,” he said.
“So if you’re able to raise money at negative rates, then even earning a 0 per cent return on money you’re lending out can still net you a profit.”
Will Australian banks ever offer zero-interest home loans?
In December last year, Australian government bonds turned negative for the first time.
That followed a year where lenders embarked on a race to the bottom and new home loan commitments reached record highs, which caused fixed loans funded by banks to nearly quadruple between March and June 2020.
But analysts say banks will struggle to cut rates further, as their profit margins have been squeezed.
Meanwhile, the Reserve Bank has hosed down talk of the cash rate hitting zero, though governor Philip Lowe has promised to maintain a 0.1 per cent cash rate for the next three years.
And the central bank has also embarked on a $100 billion quantitative easing program and a $200 billion term funding facility, both of which will help drive down the cost of borrowing.
Dr Gross said the proliferation of negative rates in Europe, especially for government bonds in countries like Germany, was a sign their economies would worsen before normalising.
And although 2020 taught households to “never rule out the unexpected”, it’s unlikely Australian home loan rates will drop to zero.
If they did, he said events leading to that scenario would be “severe and negative”.
Similarly, Canstar group executive Steve Mickenbecker said households would only see rates like Denmark’s through a “horrendous geopolitical event” that pushes Australia into a drawn-out recession.
“I can’t see it happening … as we’ve got the green shoots of a recovery,” Mr Mickenbecker told The New Daily.
“The only actions that could prompt them are events on the scale of the oil shock, an uncontrolled COVID outbreak, the sub-prime crisis, or a deepening of the US-China trade war.”
However, with banks tapping low-cost funding, there’s still wriggle room for mortgage rates to fall further, he said.
“Is it possible we’ll see lower rates? Of course,” Mr Mickenbecker said.
“Banks are prepared to give away some of their profit margins on low-risk loans to get the money available, and we’ll continue seeing rates chip away at the bottom end of the market.
“But I think the big banks have gone as far as they’d like to go.”
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