Defying Logic: 0 Percent and Negative Mortgage Rates

For months, VA mortgage rates have bounced around near historic lows, a reality which raises a question: Is it ever possible for interest levels to reach zero or below?

In fact, loans rates can touch zero and sometimes there can even be negative interest. The idea of "negative interest" seems to defy logic. Why would a lender make a loan when there is no return? In fact, how can there be a loan where the lender expects to get back less principal?

One way to knock down rates is to have a lot of cash chasing very few investment opportunities. It's the old supply-and-demand game, and it really can happen. According to Forbes magazine, "T-bills got so popular that for brief periods between 1938 and 1941 they carried negative interest rates." (See: "A Brief History of Stock Fads," September 14, 1992)

More recently, the US Treasury sold securities in January worth $15 billion with an interest rate of -.63 percent.

The real return to Treasury investors was actually less in terms of buying power. That's because the money they get back will have reduced buying power as a result of inflation. As of March, annual inflation in the US was running at 1.5 percent.

It's actually a good thing that the Treasury can float loans and not pay interest. If the Treasury did pay interest, then one result would be an increased federal deficit.

I bring up the subject of negative interest because it actually has something to do with VA mortgages.

To have a mortgage -- to borrow cash -- there must first be someone or something that has money available to lend. When rates are as low as we have seen in recent months it means the marketplace is flooded with capital. There is plenty of cash available for people to borrow, if that were not the case then interest levels would be higher.

Huge volumes of cash come to the US marketplace because investors worldwide want their money in a safe place. Those Treasury securities with negative interest might seem awfully strange, but a small loss in the US marketplace is actually a much better option for some investors than keeping money in a number of markets worldwide, places where capital is less safe and where risk is far greater.

No one knows where mortgage rates are headed, but for the moment at least we can say that interest rates today are in a trough. That's happy news for borrowers, a good time to look at financing and refinancing.