There has been a lot of interest lately in interest rates, as President Donald Trump has been pushing Fed Chairman Jerome Powell to make deep cuts in the the already low Fed Funds rate. A couple of European countries are already in negative interest rate territory, so it’s not unprecedented. However, many homeowners and prospective home buyers are wondering what a negative interest rate environment could mean for mortgages and other consumer credit vehicles.
A negative interest rate environment could have a significant impact on consumers.
“INTEREST COST COULD BE BROUGHT WAY DOWN,” Trump tweeted on Wednesday. He continued, “The USA should always be paying the lowest rate.”
How exactly would negative interest rates work?
“Most people think they’d get money back … but not really,” says Senior Economist George Ratiu of realtor.com®. “A portion of your loan is forgiven each month so you end up paying a little less over the life of the loan.”
Of course, banks aren’t going to start giving away money for free. So to recoup the loss that would happen as the loan is amortized, banks will like increase fees significantly. So the upfront costs to borrow could rise.
Another possible outcome of a negative rate environment, should the US take this step, is that home buyers may qualify for larger mortgages or it may help those who are right on the cusp of qualifying, due to lower incomes or higher debt. Presumably, negative rates will result in lower mortgage payments, which impacts debt-to-income ratios.
Just a month ago, the Danish bank Jusnk Bank, unveiled 10-year mortgages with a negative 0.5% interest rate. Another Danish bank, Nordea, has a 20-year fixed-rate mortgage product at 0% interest, and a longer, 30-year fixed mortgage with 0.5% APR.
Incentives to Save
In addition to higher fees to borrow money (which of course, is offset by low rates), consumers may find little incentive in savings accounts. Interest on deposit accounts is already low, around 1% (although you can get better rates through Internet banks). If rates go lower or negative, then banks will likely implement or increase fees on savings accounts, which means you could be paying the bank to hold your money, rather than the other way around.
Retirees could be the hardest hit in this scenario, as many rely on interest from investments and savings to augment Social Security. This could drive some increased interest in stocks that pay higher dividends – but these investments do carry more risk than Treasuries or CDs.
As of right now, the Fed is signaling that they are looking at modest quarter point cut at the next Fed meeting on September 17, so we aren’t in too much danger of a negative interest rate environment yet. The future is not yet known. However, if the economic outlook justifies further rate cuts over the course of the next year, it’s possible that interest rates could approach zero or go negative.
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