Understanding Negative Interest Rates: Why Banks Won't Make You Pay for a Mortgage

Currently, there is a growing awareness of negative interest rates among the general public. However, the idea of banks actually paying consumers to have a mortgage is a misconception. While negative interest rates exist and can be found in central banks' policies, the reality is different when it comes to consumer lending such as mortgages.

What Are Negative Interest Rates?

Negative interest rates have been around for a while, a tool used primarily by central banks to promote the velocity of credit in the economy. These rates mean that a central bank charges a fee to the commercial banks for holding excess reserves, essentially making it more expensive for them to store money. This can encourage banks to lend more, thus stimulating the economy.

Why Banks Won't Charge Negative Interest Rates for Mortgages

Contrary to popular belief, private banks in the US, such as those under the Federal Reserve's purview, will never charge negative interest rates on individual loans. This is due to several reasons:

No Profit Maximization: Lending money is fundamentally a business with the goal of making a profit. Negative interest rates would mean that banks would lose money on every loan, which is not economically viable. Consumer Incentives: If banks charged negative interest rates on mortgages, it would not incentivize consumers to spend more. Most homeowners keep their equity earned from mortgages to pay off other debts or invest, rather than pay negative interest. Government Reserves: Central banks, like the Federal Reserve, are charging negative rates to other banks, not consumers. These rates are implemented to encourage banks to lend more, not to penalize them for holding onto their reserves.

Conceptual Misunderstanding of Negative Interest Rates

The idea that banks offering mortgages at negative interest rates is a conceptual misunderstanding. If negative interest rates were applied to mortgages, it would mean that monthly payments for a home loan would decrease, and in theory, consumers would earn money from their payments. However, this scenario is highly unlikely in the real world.

Economists and financial experts suggest that even if the government were to introduce incentives for negative interest rates, it would be extremely short-lived and unlikely to last as long as a 30-year mortgage term. In the short term, negative rates might see temporary incentives, but for long-term financial products like mortgages, negative interest rates would be counter-productive.

Why Negative Interest Rates Are Unlikely for Consumer Loans

For consumer loans such as mortgages, the financial implications of negative interest rates are complex and not desirable. If banks were to offer negative interest rates on mortgages, they would have to replace the revenue lost by charging negative rates, which would likely involve increasing other fees or decreasing the interest rates on other loans.

Furthermore, the concept of negative interest rates on conventional savings accounts and investments (like stocks and crypto currencies) would undermine the confidence in those systems. People would have an incentive to invest elsewhere rather than keep their money in banks. This would lead to a significant shift in the financial landscape, making it more difficult for banks to function as they are currently structured.

Given all these factors, the only organization that would dare to impose negative interest rates is the government, and even then, it has resisted reaching such levels. In August of 2020, the Federal Reserve charged banks 0.5% interest, but this was a temporary measure to stimulate the economy during a crisis.

For now, and likely for the foreseeable future, negative interest rates will remain a tool for central banks to manage monetary policy rather than a strategy for consumer lending.

Conclusion: While negative interest rates exist in governmental and central bank policies, private banks like those in the US won’t ever charge negative interest rates on consumer loans such as mortgages. The idea is rooted in theories rather than practical application for consumer financing.