LISBON, Portugal–Lenders paying borrowers for their mortgages?
Just a few days after CUToday.info reported here that negative interest rates are a tool the Federal Reserve said it might someday consider, three countries in Europe that have already seen negative interest rates offer a potentially troubling look at just what scenario might mean.
Some lawmakers and consumer advocates in Spain and Portugal are arguing that when rates go negative lenders can owe money to borrowers, according to The Wall Street Journal. And in one country, Denmark, payments to some borrowers by banks have been taking place for four years.
“Banks in the two countries, struggling to recover from recessions that shook their financial systems, are fighting back, with billions of dollars in mortgage interest payments potentially at stake,” the Journal reported.
In Portugal, a law has been proposed that would require banks to pay borrowers when interest rates turn negative. While fighting the proposal, banks in Portugal, as well as neighboring Spain, have been rewriting new mortgage contracts to warn homeowners that they could never profit from subzero rates, the Journal said.
The Wall Street Journal said that in both countries banks typically tie interest rates on mortgages to the euro interbank offered rate, or Euribor, a fluctuating rate banks pay to borrow from each other. In addition, interest rates in both countries include a fixed percentage of the loan, called the spread. The Euribor has yet to decline to a point where it has wiped out spreads.
But Denmark offers a precedent. That country’s banks have had to pay thousands of borrowers interest on their home loans, nearly four years after the central bank introduced negative interest rates, according to the Journal. In response, Danish banks have increased some fees to compensate but never mounted serious legal objections.