What happens in negative IR environment?

@Redom @euro73 and others
I am trying to get my head around negative IR,
What does it really mean for property market?
I pay less then I borrow?
Why would bank want to lend for negative rates?
Whats the rational for buying -veRateBonds?


A Danish bank is offering mortgages at a 0.5% negative interest rate — meaning it is basically paying people to borrow money

 

Yes the bank would rather take a small loss now than a big loss later

 

Don't get too excited.
Banks will never lend to consumers at negative rates.
Not gonna happen.
These negative rates in the news are just between institutions.

 

Or untill something really goes wrong which was unplanned for and they post a really really big loss, with the possibility of an entire banking system under stress.

 

Central banks try to force banks to lend more by forcing them to pay negative interest rates on any surplus.. I guess it cost less for the bank to lend it at a loss and make up some of the loss with fees

 

I think you are going to see in the media various 'analyses' from gurus and financial entertainers testing the intellectual validity that will steal the varying degree of the potency that comes with a 0--5% interest rate..
Myself i just hope all the banking div's come in before the xxxx hits the mach2 high speed star x delta fans..

 

It is very possible also unlikely. The Danish thought it was impossible. It was also thought it was impossible for Trump or Scomo to become leaders, or for a machine heavier than air to fly or computers to be in every house.

 

Australian banks have a margin of 2.25 to 3.25% margin on loans...

So even if the rates here got to zero...interest rates here would still be 2.25% to 3%. That would be awesome for some like me...as my current yearly borrowing costs would drop from 200k per year to something like 105 to 135k.

This would mean people who own hard assets like real estate and shares would do well. Whilst savers who hold cash could struggle.....

Exciting times indeed....

 

Agree
Sign up to our negative interest loan *fee's & charges apply
(*Joining fee of $300, monthy fee of $60, late payment fee of $60, any arrears charged at 20% interest, early termination fee of $5,000, closing fee of $1500 )

 

There are a few lenders already offering 2.99% at the current cash rate so I think it would go a lot lower than that.

- Andrew

 

Maybe if they get real competitive, , it might even drive down their profits and dividends.
Might be a opportunity for the big 4 to drive some of the smaller banks to the wall .
Sounds like 1929 all over again , when it was the banks themseves that went bust..

 

Don't be fooled most people will not get rates this low. Mos of the brokers on here will not put people onto this lenders. The rate are more likely to be 3.29% PI.

I also see rates going down to just below 3% variable for OO P&I. That means 2 more rates cuts are on the cards. The period of low rates are here to stay for another 2-3 years.

 

Remember that a lot of Aussie banks' borrowings come from overseas wholesale funders. Their funding can't be easily covered by customer deposits (and that funding base can reduce significantly if they offer negative deposit rates).

As well, even if the bank bill swap rate becomes negative, banks have to pay a margin on top of that base rate, and also they wouldn't be able to pass that in full because they have many other costs to cover - admin, payrolls, occupancy, IT, etc. Operating costs easily eat up half of the net interest margins of banks, and why would they want to diminish their profits, dividends and share price? Their bonuses are very much to the share price (despite what they may want us to believe otherwise).

 

Yes..but not majors...

 

Make that at least 10 years. The Australian economy is going nowhere at this rate. There's no need to raise rates anytime soon in the next 10 years. Unless we discover some golden black swan event to save us, or some global shocker like hyperinflation in the US.

 

That old chestnut... Banks Offshore funding costs are a lot lower than many years ago so banks crying that their funding costs are going up is just banks trying to keep more money to themselves

Long term Offshore @ 10%
Short term Offshore @ 8-9%

https://www.rba.gov.au/publications...-funding-costs-and-lending-rates.html#graph-3

 

I think when they talk about negative rates, they are talking about negative real rates. Ie the interest rate minus inflation.

In this instance, when they talk about paying you to borrow, it is less direct than this. It means that that central banks have removed any incentive to keep money in a bank account because the money is losing value faster than the interest rate compensates you.

So you have to get your money out of cash and into growth or yielding assets. This is what they mean by paying you to borrow.

 

Correct, but that doesn’t matter. It’s available and there are great products available outside major banks.

- Andrew

 

Yes...but some are lot harder to get loans than people think. ...