With Negative Rates, Homeowners In Europe Are Paid To Borrow

ISBON—Paula Cristina Santos has a dream mortgage: The bank pays her.

Her interest rate fluctuates, but right now it is around minus 0.25%. So every month, Ms. Santos’s lender, Banco BPI SA, deposits in her account interest on the 320,000-euro mortgage, equivalent to roughly $380,000, she took out in 2008. In March, she received around $45. She is still paying principal on the loan.

Ms. Santos’s upside-down relationship with her lender started years ago when the European Central Bank cut interest rates to below zero to reignite the continent’s frail economy in the midst of a sovereign-debt crisis. The negative rates helped everyone get cheap financing, from governments to small companies. It gave an incentive to households to borrow and spend. And it broke the basic rule of credit, allowing banks to owe money to borrowers.

Ms. Santos’s case was supposed to be rare and mostly over by now. After the ECB cut interest rates to below zero in 2014, economies in the eurozone improved and expectations were that rates would rise in a few years. But the coronavirus pandemic changed all that.

As economic pain in Europe drags on, the negative rates remain—and they are getting lower. As a result, more borrowers in Portugal as well as in Denmark, where interest rates turned negative in 2012, are finding themselves in the unusual position of receiving interest on their loans.

“When I took the mortgage, I never imagined this scenario, and neither did the bank,” said Ms. Santos, a 44-year-old business consultant.

Deco, a Lisbon-based consumer-rights group that in 2019 estimated that rates had turned negative on more than 30,000 mortgage contracts in Portugal, said the figure has likely more than doubled since then.

Many European borrowers have variable-rate mortgages tied to interest-rate benchmarks. Like most in Portugal, Ms. Santos’s is tied to Euribor, which is based on how much it costs European banks to borrow from each other. She pays a fixed 0.29% on top of the three-month Euribor rate. When she took out the mortgage in 2008, three-month Euribor was close to 5%. It has been falling in recent months and is now near a record low, at minus 0.54%.

Portugal’s state-owned Caixa Geral de Depósitos SA said about 12% of its mortgage contracts currently carry negative rates. The number of such contracts rose by 50% last year, according to a person familiar with the situation. Ms. Santos’s bank, BPI, said it has so far paid €1 million in interest on mortgage contracts to an undisclosed number of customers.

Spain, where most mortgages are also linked to Euribor, faced a similar situation. But the country passed a law that prevents rates from going below zero. Portugal did the opposite, passing a bill in 2018 that requires banks to reflect negative rates.

“In the event that the decline in interest rates exceeds the mortgage spread, the client would not pay interest, but in no case [would the bank] pay in favour of the borrower,” said a spokesman for Banco Bilbao Vizcaya Argentaria SA, one of Spain’s largest lenders.

There are no official figures available on how many mortgages are currently carrying a zero interest rate in Spain. Banks have declined to disclose their numbers.

In Denmark, more borrowers have seen their rates turn negative, although in most cases they are still paying their banks because of an administration fee charge.

There, mortgages aren’t directly financed by the banks, which don’t set their terms. Instead, they serve as a type of intermediary, selling bonds to investors at a specific rate, lending the same amount to the borrower for the same rate.

Nykredit, Denmark’s biggest mortgage lender, said more than 50% of its loans with an interest period of up to 10 years have a negative interest rate before the fee. That proportion is rising because mortgages tend to have their rates adjusted every few years.

That is the case for Claus Johansen, 41, who works in Nykredit’s mortgage department. In 2016, he took on a five-year adjustable-rate mortgage for 1.2 million Danish kroner, equivalent to roughly $190,000, to buy a house north of Copenhagen. His interest repayments for the first five years were set at 0.06%. In January of this year, the rate was revised to minus 0.26%, which is subtracted from a 0.6% administration fee he has to pay the bank.

“It’s odd, but negative rates have been around for so many years, we just got used to it,” Mr. Johansen said.

A flip side to borrowers receiving interest from their lenders is that banks in Denmark and elsewhere have started charging customers for their deposits, saying they can no longer absorb the negative rates their central bank charges them. Mr. Johansen said he keeps his account balance under the threshold at which his bank would start charging him.

In Lisbon, Ms. Santos said that while it is great to receive interest from her bank, her situation overall isn’t better off because BPI has sharply cut the interest it offered on her business deposit account in recent years, to close to zero, from around 3%. Her plans to buy a new house are on hold because BPI is now charging a much higher spread on new mortgages, to avoid falling into the negative-rates trap again.

“We wanted to move out of the city centre, but it is hard to leave such a good mortgage deal behind,” Ms. Santos said.

Could a recession be the best time to launch a tech startup?

A recent study suggests that is the case. The authors found that tech startups that began operations during the 2007-09 recession—and received their first patent in that time—tended to last longer than tech startups founded a few years before or after. And those recession-era companies also tended to be more innovative than the rest.

“The effect of macroeconomic trends is not always intuitive,” says Daniel Bias , an assistant professor of finance at Vanderbilt University’s Owen Graduate School of Management, who co-wrote the paper with Alexander Ljungqvist, Stefan Persson Family Chair in Entrepreneurial Finance at the Stockholm School of Economics.

Drawing on data from the U.S. Patent and Trademark Office, the authors examined a sample of 6,946 tech startups that launched and received their first patent approval between 2002 and 2012.

One group—about 5,734 companies—launched and got their patent outside of the 2007-09 recession. Of those, about 70% made it to their seventh year. But the startups that launched and got their first patent during the recession—about 1,212 companies—were 12% more likely to be in business in their seventh year.

These recession-era firms were also more likely to file a novel and influential patent after their first one. (That is, a patent the researchers determined was dissimilar to patents in the same niche that came before it, but similar to ones that came after it.)

So, why did these recession-era firms outperform their peers? Labor markets played a big role.

A widespread lack of available jobs meant that the startups were able to land more productive and innovative employees, especially in their research and development groups, and then hold on to them. More important, the tight labor markets also meant that the founding inventors—the people named on the very first patent—were more likely to stick around rather than try for opportunities elsewhere.

For startups started during the 2007-09 recession, founding inventors were 25 percentage points less likely to leave their company within the first three years. On average, about 43% of founding inventors in the entire sample left their startup within the first three years.

“Our study really highlights the importance of labor retention for young innovative startups. Retaining founding inventors cannot only help them survive, but also thrive,” Bias says.

With Negative Rates, Homeowners In Europe Are Paid To Borrow

Covid-19 is widening the pool of mortgage holders who receive interest.

A study suggests that when jobs are hard to come by, the best workers are more available—and stay longer