Negative interest rates. This is a term that may be new to you or at least a recent addition to the collection of phrases you store up in your brain. In practice, negative interest rates are pretty new territory to explore, like discovering a new galaxy, or trying your Aunt’s moose jelly spread. You just don’t know what to expect. A few years ago I never knew such a thing as negative interest rates could truly exist. In fact, it wasn’t until 2014 that any major bank even tried using negative interest rates.
Today, there are a few countries around the world testing out negative interest rates such as Denmark, Sweden, Switzerland and Japan.
As our dollar, our resource sector and our economy performed poorly at the end of last year, there was even talk of Canada using negative interest rates to boost the economy. Not so much these days as the dollar has rebounded and oil is up (for now). Still, it is something that has been contemplated once and may be contemplated again if necessary.
But just how do negative interest rates work? Well, we currently have an interest rate just above zero. The banks use this interest rate to guide their lending rates and set up how much money you would make on your savings. The lower the interest rates, the less you will make on your savings account, and the cheaper it would be to borrow money for something like a mortgage. If the interest rates go far enough below zero, then saving money could actually cost you money. If we did have negative interest rates, you would be essentially paying the bank on any money you may have in an account. You would be better off to stash your money under your pillow. Though it would not be far less safe there, it would be worth more than if you put it in a bank with negative rates.
In terms of borrowing money in the negative interest rate scenario, things would be quite favourable. If negative interest rates were low enough, in theory you could actually make money from borrowing, though I suspect banks would not find that very profitable. Negative interest rates would likely lead to just lower mortgage rates than we have now.
In the past ten years, mortgage rates have been a point of pride for many people. The lower one’s mortgage rates, the more bragging rates you have to your friends who locked in at a higher rate. There have been times over the past ten years when there was a fear that rates would go up, but it never really seemed to have happened in a meaningful way. In fact, just when we thought the rates would not go any lower, they were lowered, becoming more appealing to people to buy homes while paying less interest, and refinancing their mortgages or starting a new term with a lower mortgage.
From a real estate perspective, negative interest rates would certainly make mortgage rates even more appealing.
This would work our best for those of you who are renewing their mortgages. You could start your next mortgage term paying less than your previous mortgage term at an even lower rate. If you are buying, you will also benefit by paying less in interest during your term, and you may qualify for more of a mortgage. The downside for buyers is that lower interest rates do contribute to higher prices. It allows more people to borrow at a higher cost and subsequently more people can buy at a higher price points.
The intention of bringing in negative interest rates has little to do with Toronto real estate.
From the big picture perspective of the Canadian economy, negative interest rates would be used to combat a sluggish economy with a possible deflationary bent. The government would try to stimulate the economy by encouraging less saving and more spending to improve the economy.
In terms of Toronto real estate, we are not exactly in a position of needing to encourage more spending. There are plenty of buyers. The problem is that there is not enough houses or larger condos to buy. This is hardly the place you want to encourage more borrowing. Negative interest rates would benefit sellers and not buyers. It may be best to keep interest rates in positive territory. Buyers do not require more incentives.
Still, I would not be be surprised if the government did come up with another scheme to “tame” the real estate markets of Toronto and Vancouver in 2016 that has nothing to do with interest rates. In the past, they usually try to make it more difficult for buyers to qualify for a mortgage. Their efforts usually have had little effect.
These days I don’t think there is much chance of going into negative interest rate territory, but you never know what direction the economy would head toward. We may drop our interest rates even lower by another .25 %, but I suspect there is little chance of it going up. Love it or not, low interest rates are here to stay. No negative rates yet, but who knows what the future could hold?