You may have heard about how there is now somewhere around $16 Trillion of debt in the world paying negative interest. That means that you have to pay to lend someone money. For instance, you loan them $100 and they pay you $99 back in a few years and you’re happy about it.
I don’t fully understand how this happens. Something about central banks buying up all the debt and driving the prices stupid high. Like…who wouldn’t want to be on the borrowing side of that deal? But it turns out that home buyers in Denmark are now able to get in on that deal with negative mortgage rates that pay them to borrow the money. The Jyske Bank A/S is offering them a negative 1/2% on a 10 year mortgage. That’s before fees but who wouda thought?
I constructed the graph below, which compares mortgage rates around the world, from the data in that article I just linked to. The US is towards the upper end at 3.6% a couple of weeks ago.
You’ll note that a lot of these mortgages have shorter terms than the US and that might shave off 1/4% but in Finland you can get a 0% 20 year loan!
Of course, the home buyers in other countries are borrowing their own currency, not US dollars. I think a lot of this differential across the planet is driven by the belief that these other currencies will be worth more down the road than they are today. For example if you could get one of these “great deals” by borrowing Euros, converting them to dollars, and buying your US home you would have one small problem. You’d have to pay back the loan in Euros. And guess what? Those Euros down the road are probably going to cost you more US dollars than you got for them today.
But suppose you’re really clever and you go into the futures market to lock in a price on those Euros? The futures prices on the Euros are higher than they are today. Today you’re going to get $1.11 for that Euro you borrow but if you try to lock in a price for June 2024 it’s going to cost you $1.23, which works out to about an additional cost of 2.1% per year. Hmmm. Basically this is an illustration of a finance concept called interest rate parity. The difference in interest rates across countries can be explained by the expected change in the relative value of their currencies.
As with everything economics…there is no free lunch. Except actually there is when home buyers get paid by their realtor to buy a home.
#Mortgages #HomeBuying
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market or get an insider’s view of the seamy underbelly of the real estate industry you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.