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.

Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.

This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.

Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.

Here are three strategies useful for functional families.

Intrafamily loans

It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.

But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.

If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.

To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.

In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.

If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.

Asset gifts

Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.

The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.

Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.

However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.

These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.

But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.

Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.

The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.

Sellner doesn’t worry about his children using the funds for another purpose.

“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.

Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.

Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.

Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”

Disclaimers

A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.

Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.

Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.

Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.

With Negative Rates, Homeowners In Europe Are Paid To Borrow

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

Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.

Intrafamily loans

Asset gifts

Disclaimers