Negative interest rates in Europe have created a previously inconceivable problem for some banks: They may have to pay interest to customers who borrow from them.
In countries such as Spain, Portugal and Italy the base interest rate used for many loans, especially mortgages, is Euribor, which stands for the euro interbank offered rate. Euribor is based on how much it costs European banks to borrow from each other. This benchmark and others like it have been falling sharply, in some cases into negative territory, since the European Central Bank introduced measures last year meant to boost the eurozone economy.
Because banks set interest rates on many loans as a small additional percentage above or below a benchmark such as Euribor, the tumbling rates are leaving some banks facing the paradox of actually owing interest to borrowers. At least one bank, Spain’s Bankinter SA, has been paying some customers interest on their mortgages by deducting that amount from the principal the client owes.
The novel problem is just one of many challenges caused by negative interest rates. All over Europe, banks are being forced to rebuild computer programs, update legal documents and redo spreadsheets to account for negative rates.
Banks, hoping to avoid the expense of having to pay their borrowers, are turning to central banks for guidance. But what they are hearing is less than comforting.
Portugal’s central bank recently ruled that banks would have to pay interest on existing loans if Euribor plus any additional spread falls below zero, although banks are free to take “precautionary measures” in future contracts. More than 90 per cent of the 2.3 million mortgage contracts outstanding in Portugal are variable rate and linked to Euribor.
In Spain, a spokesman for the central bank said it is studying the issue. The vast majority of Spanish home mortgages have rates that rise and fall tied to 12-month Euribor, says Irene Peña, an economist with Spain’s mortgage association. That rate currently stands at 0.187 per cent.
Bankers in Italy say they are awaiting guidance from their local banking association, because loan contracts don’t include any clause on what happens if benchmark rates go negative. About half of the mortgages outstanding in Italy have variable rates, most of them linked to Euribor, according to local mortgage broker Mutuionline.
Bankinter, Spain’s No. 7 lender by market value, has been forced to chip away at some clients’ mortgage principal payments since another interest-rate benchmark tied to Switzerland’s currency has dipped into negative territory. During Spain’s home-building frenzy in the mid-2000s, Bankinter issued mortgages tied to the one-month Swiss franc iteration of the London interbank offered rate, or Libor. At the time, clients were attracted to the offer because Swiss franc Libor was lower than Euribor, the traditional reference for Spanish mortgages.
“I’m going to frame my bank statement, which shows that Bankinter is paying me interest on my mortgage,” said a customer who lives in Madrid. “That’s financial history.”
John Benke from RFS Finance can assist with any property financing queries. You won’t find a more experienced mortgage broker. Call John on 0417 196 970