Negative mortgage rates can be handled

Published 05-05-2015

The Danish Minister for Business and Growth appointed a working group in early February 2015 tasked with analyzing mortgage banks’ challenges with handling negative interest rates. The working group has now submitted its report to the Danish Minister for Business and Growth.

The working group concludes that the challenges in handling negative interest rates are limited to mortgage loans and mortgage bonds funded by floating-rate bonds where the rate is adjusted more frequently than the refinancing of the loans.

The working group also concludes that it is up to the individual mortgage banks to decide how to handle negative interest rates on existing loans. This will depend on an interpretation of the relevant loan and bond terms and general contract law.

It has therefore been the working group’s focus to discuss models for handling negative interest rates on new floating-rate mortgages. The working group considers that overall there are three models for handling negative interest rates. One model implies that the coupon rate may have  a floor of 0 percent. The other two models have in common that the coupon rate has no floor. The working group notes that it cannot be deter-mined which model is best for the borrower, and does not recommend any specific model.

Minister for Business and Growth Henrik Sass Larsen:

"I am pleased that we now have clarity about how mortgage banks can handle negative interest rates going forward. It's good for the bor-rowers and for the continued confidence in the Danish mortgage system. I am also pleased that the models, the working group has put forward, means that borrowers receive the negative interest rate."

"In relation to the models put forward, I think that it is most natural that the borrower continuously receives the negative interest rate either as a write down of outstanding debt or as a direct payment. That is the most logical and transparent models for consumers, also in relation to tax payments. However, I understand if there may be a need to use a model with a floor for the coupon rate for a transitional period until investors are ready to handle negative coupons."

"The working group sees no immediate need for legislation. I will monitor this area closely in order to assess whether the interest rate developments and the mortgage banks’ handling of negative interest rates call for future legislative initiatives."

The participants of the working group have been representatives from the Danish mortgage banks, the Association of Danish Mortgage Banks, the Danish Mortgage Banks' Federation, the Danish Bankers Association, the Danish Insurance Association, VP Securities, the Danish Financial Supervisory Authority, Danmarks Nationalbank, the Danish Ministry of Taxation and the Danish Ministry of Business and Growth. The Danish Ministry of Business and Growth chaired the working group.

With a view to clarifying the tax treatment of negative interest rates, the Danish tax authorities issued a so-called Guidance on 27 February 2015, which provides an interpretation of the applicable rules. The Danish tax authorities establish in their Guidance that negative interest should be equated with positive interest for tax purposes. Interest expenses are thus tax-deductible for lenders (bank depositors or bond investors), and interest income is taxable for borrowers. Reference is made to the Guidance by the Danish tax authorities, which is attached to the report as Appendix 1. 

Negative Mortgage Rates (pdf)

Contact: Søren Møller Nielsen,, 22 44 50 60