The unlikely dream of free mortgages

Can anyone imagine asking for a mortgage and not being forced to pay the interest by the bank? It seems like a dream, but in Denmark it has happened. The Danish bank Nordea Bank Abp sells a 20-year fixed rate 0% interest mortgage loan. This announcement raised the question about whether we are facing a new trend in the world of financing in Europe. And the first thing to consider to answer is that the mortgage market in the Nordic country works in a particular way.

The big business of Danish banks is to act as intermediaries between home buyers and real estate investors. Entities lend money through their mortgages and then put together several with similar characteristics in a bond (known as securitization) and sell it to investors. Although this practice also occurs in other countries, such as Spain, in the case of Denmark it is more common, as stated in a Help My Cas reporth. Therefore, your source of income is not the interest on the mortgage, but the commissions for opening the loan or for its sale to third parties

On the other hand, the Central Bank of Denmark has maintained a negative interest rate policy since 2012 in order to ensure the parity of the Danish krone with the euro and thus stimulate consumption. In addition, Elisabet RuizDotras, professor of Economics and Business Studies at the Open University of Catalonia (UOC), recalls that Denmark, as is the case with other European countries, “is in a time of recession” and low personal spending . Therefore, they are making a series of economic stimulus decisions to try “lower the price of money, so that there is more demand and for people to ask for more loans, which translates into more investment and more consumption”.

Could we see it in Spain?

So, would it be possible to see something similar in Spain? Ruiz-Dotras is clear: “Yes it is possible, but unlikely.” The UOC professor insists that Denmark has been able to do so because it has its own currency and its own central bank, as well as a different mortgage market.

From HelpMyCash they also consider that it is “unlikely” because it would mean giving up one of their main sources of income. The Spanish mortgage model is much more traditional: the bank lends money to the client to buy a house and takes out a margin with the interest on the mortgage loan. Consequently, “A good part of the benefit that entities obtain when granting mortgages comes from the applied interests, unlike what happens in Denmark”, HelpMyCash experts explain.

Furthermore, the supply of housing in Denmark is lower and there is a higher demand, which reduces the risk that housing prices will fall. This explains, in part, why their banks dare to make securitisations; a practice that is much less common in Spain. According to the Spanish Mortgage Association, in the country only around 14% of mortgages are securitized.

Another important point to take into account is that financial institutions in Spain currently have profitability problems, “which makes it less likely that they decide to stop charging interest on their fixed-rate mortgage loans,” they point out from the comparator.

If this type of real estate credit were marketed in Spain, it would be clear that nothing is free, not 0% mortgages. José María Alcañiz, professor at the Center for Financial Studies (CEF), explains that this product would have others linked to ensure a series of income: direct debit of payroll, receipts, a home insurance contract … “They can give you a zero-rate mortgage, but whenever they give you something there is a strategy behind it”, says the UOC professor.

No mortgages at 0%, but yes at 1%

In Spain there are no fixed mortgages at 0%, but there are banks that apply rates so low that they even reach 1%. The BBVA Fixed Mortgage has an interest of 1% if the money is returned within a period of up to 15 years. It is closely followed by My Investor’s A Tu Manera Fixed Mortgage, which has an interest rate of 1.09%, also with a term of up to 15 years. If the client wants a longer repayment term, of 20 years, the Liberbank Real Madrid Mortgage has an interest of 1.15%. On the other hand, the 20-year Banco Santander Fixed Online Mortgage has a rate of 1.2%.

However, to get these interest rates, you have to contract a series of linked products. In the cases of BBVA and Liberbank, the client will have to direct the payroll, take out home and life insurance. With respect to My Investor, in addition, the client will have to contract a pension plan. The mortgage of Santander Bank it is stricter in this case, since it only grants 60% of the value of the property and it is necessary to direct payroll and hire a pension plan, home and life insurance.

The Euribor turns 5 years negative

Banks have another open front on the issue of mortgages, but in this case in the category of variables. Most variable property loans are subject to the Euribor, which has been trading negative for 5 years. On February 5, 2016, this index fell below the zero threshold for the first time, marking -0.002%. Now it stands at -0.503% (at the end of January), which benefits the mortgaged, but reduces the profits of the banks.

In this way, citizens with variable mortgages who review their mortgage this month will see a significant discount in their payment. For a 30-year mortgage of 300,000 euros with Euribor + 0.99%, the total savings will be 373.92 euros. While each month they will pay 31.16 euros less, going from the 929.60 euros they paid until now to 898.44 now, according to iAhorro’s calculations.

With these data in hand, if the Euribor continues to fall, would banks have to pay customers? The OCU has started a campaign to demand the application of negative interest on mortgages, since they suggest that in many of the mortgages signed between 2006 and 2010, the applicable spread is less than 0.5%, so a negative type would come out.

But this requirement collides with the law regulating real estate credit contracts, which came into force on June 16, 2019, and which has a section that makes it clear: “The remunerative interest in said operations may not be negative.” That is, the bank will not be able to pay the customer for a mortgage and marks zero as the floor. But for the previous mortgages there is nothing written, so the Bank of Spain leaves in the hands of the courts the possibility that those mortgaged whose loan now records a negative interest due to the collapse of the Euribor recover the money.

Professor Alcañiz points out that it seems “very difficult” for this return to occur, since it would mean a lot of money for the banks “. . But Elisabet Ruiz-Dotras points out that the client “has every right and that it should be like that”, although she clarifies that the most normal thing is that nothing is achieved unless the European Union justice is resorted to. “It is difficult because it is a minority, because it has to be people who contracted a variable mortgage with almost no differential”, states.

Despite the fact that the Euribor has been negative for many years, the fixed-rate mortgages established are increasing little by little. According to data from the National Statistics Institute (INE), in November 2020 (latest data available) 28,756 mortgages were registered on homes. 49.2% of them were established at a fixed rate. A percentage that has grown strongly in recent years. In the same month of 2019, the percentage of new mortgages at a fixed rate was 45%; 39%, in 2018; and 3.5% in 2010.

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