How Negative Interest Rate Home Loans Would Work?

When we are looking for home loans, we tend to go with the loan product that charges the lowest rate of interest. What if the bank were to charge you a negative interest rate? Essentially, the bank pays you to take a loan from them. Not possible? Well, a Danish Bank has just done that. Jyske Bank, Denmark’s third largest bank, is offering 10-year mortgage at -0.5% p.a. Technically, it is not a pure home loan. It is an add-on loan on an existing mortgage. However, a negative interest rate home loan is still a novelty.

Why would a bank offer a home loan/mortgage with a negative interest rate? How would the bank make money on such a loan? Well, Government bonds yields in Japan and a few European countries are negative. So, the concept of negative interest loans is not entirely new. For more on why investors would opt for negative rates or yields, here is a primer on Investopedia. When it comes to loans, the bank is the investor and you are the borrower. The aforementioned Danish bank says it can borrow from institutional investors at a negative rate and is passing on the cost benefit to investors.

In India, we are nowhere near negative interest rate home loans. We have a much higher rate of inflation and have higher deposit and loan interest rates. The inflation rate in Denmark is much lower, around 1%. Negative interest rates on deposits can also be policy to dissuade investors from saving money and instead spend it. This is to provide fillip to the economy. Not easy to achieve desired results though.  On a side note, the rental yields in Denmark are about 6% p.a. (basis feedback from a client based in Denmark). There are banks offering 20-year mortgage at 0% and 30-year mortgage at 0.5%. The inflation is less than 1%.  The residential real estate makes for an awesome investment in Denmark. Contrast this with real estate in India. The rental yields are 2-2.5% p.a. The loan interest rate is 8.5-9% p.a.

This post is not to explain economics behind negative interest rates.  My understanding of economics is quite limited too. It is a fun post to understand how negative interest rate loans would work for you.

How Will a Negative Interest Rate Mortgage Work?

I used the usual PMT function to calculate EMI for Rs 50 lacs loan at -0.5% p.a. and a loan tenure of 20 years. The EMI shall be Rs 19,804.  I assume the loan interest rate remains constant during the loan tenure. Over the loan tenure, you will end up paying a total of Rs 47.53 lacs (Rs 19,804 X 240 months). For a loan of Rs 50 lacs, you just need to pay Rs 47.53 lacs over 20 years.

Negative interest rate does not mean that the bank would offer you cash pay-out every month. However, the bank would do something similar. Each month, the principal outstanding will go down by more than the EMI amount. This would never happen in a regular positive interest rate mortgage.

Here is how the loan repayment would look like.

Month	Principal O/S at the beginning of the month	EMI	Interest	Principal repayment	Principal O/S at the end of the month
1	50,00,000	19,805	-2,083	21,888	49,78,112
2	49,78,112	19,805	-2,074	21,879	49,56,233
3	49,56,233	19,805	-2,065	21,870	49,34,363
4	49,34,363	19,805	-2,056	21,861	49,12,503
5	49,12,503	19,805	-2,047	21,852	48,90,651
6	48,90,651	19,805	-2,038	21,842	48,68,809
7	48,68,809	19,805	-2,029	21,833	48,46,975
8	48,46,975	19,805	-2,020	21,824	48,25,151
9	48,25,151	19,805	-2,010	21,815	48,03,336
10	48,03,336	19,805	-2,001	21,806	47,81,530
11	47,81,530	19,805	-1,992	21,797	47,59,733
12	47,59,733	19,805	-1,983	21,788	47,37,945
13	47,37,945	19,805	-1,974	21,779	47,16,166
14	47,16,166	19,805	-1,965	21,770	46,94,396
15	46,94,396	19,805	-1,956	21,761	46,72,636
16	46,72,636	19,805	-1,947	21,752	46,50,884
17	46,50,884	19,805	-1,938	21,743	46,29,141
18	46,29,141	19,805	-1,929	21,733	46,07,408
19	46,07,408	19,805	-1,920	21,724	45,85,683
20	45,85,683	19,805	-1,911	21,715	45,63,968
…	…	…	…	…	…
…	…	…	…	…	…
…	…	…	…	…	…
221	3,97,832	19,805	-166	19,970	3,77,862
222	3,77,862	19,805	-157	19,962	3,57,899
223	3,57,899	19,805	-149	19,954	3,37,946
224	3,37,946	19,805	-141	19,945	3,18,000
225	3,18,000	19,805	-133	19,937	2,98,063
226	2,98,063	19,805	-124	19,929	2,78,134
227	2,78,134	19,805	-116	19,921	2,58,213
228	2,58,213	19,805	-108	19,912	2,38,301
229	2,38,301	19,805	-99	19,904	2,18,397
230	2,18,397	19,805	-91	19,896	1,98,501
231	1,98,501	19,805	-83	19,887	1,78,614
232	1,78,614	19,805	-74	19,879	1,58,735
233	1,58,735	19,805	-66	19,871	1,38,864
234	1,38,864	19,805	-58	19,863	1,19,002
235	1,19,002	19,805	-50	19,854	99,147
236	99,147	19,805	-41	19,846	79,301
237	79,301	19,805	-33	19,838	59,464
238	59,464	19,805	-25	19,829	39,634
239	39,634	19,805	-17	19,821	19,813
240	19,813	19,805	-8	19,813	-0

As you can see, principal repayment per month is greater than the EMI itself. To arrive at principal repayment every month in reducing balance loans, we deduct interest component from the EMI, Since the interest component is negative, the principal repayment is more than the EMI.

This is how annual principal repayment would look like.

Year	Principal Repayment in the year	Total EMI paid in the year
1	2,62,055	₹2,37,656
2	2,60,748	₹2,37,656
3	2,59,447	₹2,37,656
4	2,58,153	₹2,37,656
5	2,56,865	₹2,37,656
6	2,55,584	₹2,37,656
7	2,54,309	₹2,37,656
8	2,53,040	₹2,37,656
9	2,51,778	₹2,37,656
10	2,50,522	₹2,37,656
11	2,49,272	₹2,37,656
12	2,48,028	₹2,37,656
13	2,46,791	₹2,37,656
14	2,45,560	₹2,37,656
15	2,44,335	₹2,37,656
16	2,43,116	₹2,37,656
17	2,41,903	₹2,37,656
18	2,40,697	₹2,37,656
19	2,39,496	₹2,37,656
20	2,38,301	₹2,37,656

You can see a principal repayment is higher in initial years. This is in sharp contrast to regular home loans with positive interest rate. Reason: Negative interest rate. The more negative the interest rate, the lesser principal you would have to pay. At -1% interest rate, you would have to pay only Rs 45.14 lacs over 20 years to settle a loan of Rs 50 lacs.

Never Forget You Are Dealing with a Bank. There Is No Free Lunch

We just talked about the interest rates. What about the processing fee and other miscellaneous charges? What if the bank uses negative interest rate as a level to force you to buy third party products? In the illustration on the bank website, you must still pay back 277,392 DHK for the loan amount of 250,000 DHK for a 10-year loan. This is because of various fees and taxes. In nutshell, you pay negative interest rate on a higher amount than the disbursed amount. The effective interest rate is low nonetheless. And the bank is still making some money.