The truth about 0% borrowing rates

by Madison Utley23 Aug 2019

While reduced longer-term funding costs for Australian lenders has allowed for the savings to be passed through to borrowers, the founder of a brokerage with nearly 20 years of experience in the industry has warned that recent record low rates carry other, less visible costs.

The trend of declining money rates is playing out in a number of markets across the globe, allowing for unprecedented offerings for borrowers.

One Danish bank has even launched a 10-year fixed mortgage at an interest rate of -0.5% per year. Following the traditional model, borrowers still make monthly repayments to Jyske Bank, but the outstanding debt is reduced by more than the consumer pays each time.

While there seem to be clear benefits to not paying interest on a loan, such as alleviating the intensity of the conversation around responsible lending and determining a potential borrower’s serviceability, it’s crucial to consider the broader implication of coming across such a rate. 

“Borrowing at 0% is not a free kick to society.  It can create a serious social burden with severe implications to income generation,” said Ian Robinson, founding director of Robinson Sewell Partners and 2017 Australian Mortgage Awards ‘broker of the year.’

Robinson highlighted that if Australian banks were able to offer a 0% interest rate while still taking a margin, it would mean there were negative interest rates in the market on a wholesale funding level, an indicator of severe deflation.

“Yes, borrowing money at zero is great, but deflation means what you purchase with that money is probably losing value,” said Robinson.

“Most people are in the mindset that their purchase is going to appreciate and be a wealth creator. With zero interest rates, it’d most likely be the reverse.”

“There might be various asset classes that defy that trend, but on the whole, the general economy facing deflation means your asset is likely depreciating.”

While the industry has been largely absorbed in watching interest rates drop to historic lows, Robinson suggested that the focus on their continued downward trajectory may be misplaced, especially in business lending situations where fast access to capital is crucial. 

“At this point, the price of interest or the cost of capital in the market is so low, it shouldn’t have that much of a material impact on someone’s personal cashflow anyway,” he explained.  

“It’s the access to credit which is actually the concern. Pushing a lower interest rate isn’t going to allow more credit to flow if the credit policy is too tight and the approval rate can’t get through the system.

“The constraint on capital or lack of capital supply is the bigger issue,” Robinson concluded.