negativzinsen

Negative interest rates are already bitter reality for private customers in Switzerland. German savers also feel worried about negative interest on savings deposits. Just as in Switzerland, commercial banks in Germany have had to pay penalty interest on their deposits to the central bank. The difference is that while some Swiss commercial banks have already passed this penalty interest on to its private customers, German banks are still waiting to do so. However, it is only a matter of time before negative interest rates reach Germany too.

This is how negative interest eats up your account balance

Negative interest rates shrink every account balance. Our infographic shows what is already a reality for customers of the Swiss ABS Bank. With an account balance of CHF 150,000, a penalty interest rate of 0.75% is charged. After five years the investor would only have 145,550 francs on his account – and this is excluding inflation. A customer of the ABS Bank would thus lose 4,450 francs in 5 years.

negativzinsen

Indication 1: 10-year government bond without interest

The most recent indication that investors in Germany will have to pay negative interest rates, is the first time issuance of a 10-year government bond with an interest coupon of 0.00%, issued on the 13th of July 2016. It was allotted at a price of 100.48%, but will only pay back 100% at maturity. At that price loss one has a negative return of 0.05% right from the start. Surprisingly, the bond was oversubscribed 1.2 times. That means that investors are now even willing to pay negative interest rates to put their money to safety. That could encourage banks to impose negative interest rates on the accounts of their private clients.

Indication 2: Penalty interest raised again by ECB

In March 2016, the European Central Bank (ECB) increased the penalty interest from 0.3% to 0.4%. Commercial banks therefore now have to pay more to park their money at the ECB. There is thus ever increasing pressure for commercial banks to pass this penalty interest on to its customers. The increase makes it ever more likely that German savings accounts will be charged with negative interest rates.

Indication 3: Business customers partially charged with negative interest

Corporate businesses have already been paying penalty interest on their account balances for some time. In February 2016, the Commerzbank announced that small and midsize business customers with an annual revenue starting at 2.5 million euros have to pay an individually agreed penalty interest rate on their balance. The banks can therefore be seen shifting their focus from businesses to the the account balances of private customers. This development shows that the first banks will soon begin to charge the account balances of private customers with negative interest.

How investors will react to negative interest

A study by the ING bank has found that 80% of German savers would cancel their accounts at negative interest rates. Few, however, would spend their money on consumer goods and services as hoped by the ECB. 44% of respondents said they do not invest their money, but prefer a “secure storage”.

How investors can avoid negative interest

Simply putting your saved money in the safe and waiting is of course not a satisfactory solution. Inflation will ensure that your hard earned money decreases. Therefore the only reasonable solution is to invest the money.

For many years government bonds, some with high interest rates, were a popular form of investment. In 1981 there was even a 10-year government bond with an amazing interest coupon rate of 10.75%. Unfortunately we have gone a long way from such potential returns and now have even arrived at negative returns on bonds. Governments bonds are now not not an alternative anymore for investing money profitably.

Shares have also not been the most profitable form of investment lately. A black Friday followed the recent Brexit which led to strong slump in worldwide share prices. The stock markets are anticipated to remain turbulent in the foreseeable future.

Demand for tangible assets

The Brexit has only further increased the demand for tangible assets. That is because in times of crisis such as this one, investors have always done well investing in tangible assets. A classic tangible asset has always been rare metals such as gold. The major disadvantage of an investment in gold is that it offers no interest payments, only an increase in value.

Achieve 5% interest with real estate

With real estate investments most tend to think it is synonymous with the purchase of a condominium. With the necessary small change that is of course possible. However, it should be noted that many additional costs are incurred when buying real estate such as land transfer taxes as well as broker’s commissions. Therefore, these also tend to be a very long-term investment.

For those who wish to invest in real estate without great hassle, it is now possible to participate in real estate projects. On iFunded you can now invest in a residential property near Kurfürstendamm in Berlin. The CASPAR THEYSS BERLIN property is only a five minute walk from Kurfürstendamm and is therefore very central. Investors receive a 5% annual interest. The collected capital totaling 750 thousand euros will be invested into the renovation of the façade and into the renovation of individual apartments.

Conclusion

There is currently evidence for German banks following the model of Swiss banks and introducing negative interest to private customers. Investors will therefore search for alternatives to savings accounts to avoid negative returns. Tangible assets will be a main focus for investors. Since it is now possible for private investors to invest small amounts in attractive real estate projects, it is likely that the demand for such investments will greatly increase. Investors can now invest in a residential property in the district Mitte in Berlin and receive a firmly agreed fixed interest rate of 5% per year and thus escape the threat of negative interest rates.