So how does that work?
In several European countries, central banks are seeing negative rates in an attempt to boost the economy. Some banks are passing negative rates on to consumers by charging depositors to keep their money; some are reducing the mortgage amount in lieu of paying the negative interest on the mortgage. Some banks are paying zero interest and charging a “maintenance fee”. As interest rates in the U.S. begin to rise, it’s fascinating for most of us to see negative rates in Europe. It’s also kind of Crazy! The idea is to encourage companies and banks to spend and invest money, rather than hold it. It seems to me like a penalty on holding money.
While we watch from across the pond, many of us in the real estate industry can’t help but wonder…will this affect American mortgages? A year ago many would have laughed at the thought. But since negative mortgage rates have taken hold in Europe over the last half-year, it is something that could be a possibility here, although most experts say it would be unlikely.
There is one possibility worth considering: Mortgages based on the Libor rate could be affected by negative rates in Europe. The London Interbank Offered Rate is an average interest rate for a group of London banks. Many financial institutions, mortgage lenders and credit card agencies set their own mortgage rates relative to it. As to mortgages, specifically, they are adjustable rate mortgages, ARM’s.
ARM’s have become a term of disdain in the United States since the mortgage collapse of 2007. Adjustable rate mortgages are to blame for many of the short sales and foreclosures that our industry has seen over the last 7 years. But for some homeowners who still have a Libor ARM, this could be good news. As the Libor stays low, it makes sense that the rate adjustments will be in their favor. Most Libor ARM’s adjust every 6 or 12 months. For borrowers that can benefit from the use of a more conservative ARM, they might become more attractive again.
Of course, the world of Adjustable Rate Mortgages is much more complicated than that. We’ll just have to wait and see what the outcome will be. Whether negative interest rates will affect U.S. mortgages or not is much more complicated than a simple calculation, as there are margins and banking standards to consider. But it certainly is worth watching. And it satisfies our need for the fascinating...and the downright crazy!
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