Danish group to tackle negative rates as some suspend ARMs
The Danish Ministry of Business & Growth has established a working group to quickly recommend how negative interest rates should be handled by the country’s mortgage lenders across a variety of products in the wake of a series of cuts by the Danish central bank.
Danmarks Nationalbank made its fourth cut in three weeks yesterday (Thursday), taking the interest rate on certificates of deposit to minus 0.75%. The moves have been in response to upward pressure on the Danish krone following the Swiss central bank’s removal of a currency cap and the launch of the European Central Bank’s expanded asset purchase programme. At the end of January the Danish central bank also suspended government bond issuance until further notice as part of its move to stem currency inflows.
Nordea Kredit and Nykredit are no longer granting new one to three year adjustable rate mortgages (ARMs), they announced this week, with yields being negative in that part of the curve. Nykredit Realkredit April 2016 ARM bonds, for example, trade at a negative yield of 0.20%.
Meanwhile, market participants said that it is unclear how upcoming coupon fixings on variable rate mortgages at the end of the quarter should be handled. According to analysts, the way in which negative rates are treated on the borrower’s side either differs or is not dealt with across documentation from different institutions and a variety of mortgage products, for example with some including a floor and others not.
“Should you really pay people to borrow money, in other words the home-owners?” remarked one market participant.
However, the industry is split on the way forward, with Realkredit Danmark, for example, having said that it will continue to write new ARMs across the curve.
Those market participants who have suspended business and turned to the authorities for guidance have said that the best way forward will be an industry-wide solution.
The Danish Ministry of Business & Growth held a meeting to this end yesterday that was attended by the Ministry of Economic & Business Affairs, the Danish FSA (Finanstilsynet), the tax authorities and industry representatives. The outcome was the announcement of a working group to come up with recommendations on how to address the situation.
“We are in a new interest rate situation,” said business and growth minister Henrik Sass Larsen. “What is needed is that we get clarity about how best to handle the situation going forward, including whether there are inappropriate barriers in the legislation.”
“In light of today’s meeting I set up a fast paced working group to examine the problem and make suggestions for possible adjustments to current legislation.”
Nordea Kredit and Nykredit have meanwhile confirmed that they will proceed with their refinancing auctions for outstanding ARMs, which are scheduled to start in the commencing 23 February.
Negative interest rates in mortgage financing have a more direct and immediate impact in Denmark because of the “balance principle”, where the terms of the mortgage and the bond financing the mortgage match. However, the situation is tempered by a shift in mortgage lending away from short dated products that the industry has engaged in in response to regulatory and rating pressures.