How do borrowers profit from negative interest?

Even if the parties did not expect that the agreed reference interest rate in the credit agreement to be negative, the borrower cannot unilaterally set the indicator to zero.

In a recent decision of the Austrian Supreme Court, it was noted that borrowers can count on a zero borrowing rate at best. Further, the facts of the case were not addressed. One question remained open, namely, whether the negative credit indicators would have to be passed on to the consumer and borrower up to the agreed credit margin – up to a zero percent borrowing rate? The Austrian Supreme Court now has an answer to it:

In the years 2005 and 2006, the defendant bank granted the claimant two loans with respectively variable interest rates. The borrowing rate should be calculated from the relevant indicator value plus a fixed markup. As an “indicator” was agreed Libor (London Interbank Offered Rate) in one contract and the Euribor (Euro Interbank Offered Rate) in the other contract. Upon completion of the credit agreements, the parties have not considered that the agreed reference interest rates Libor and Euribor would ever have a negative value. The Libor was negative for the first time in December 2014, while Euribor showed a negative value for the first time in May 2015.

Judgment creates more clarity

The bank was not entitled to set the reference value at zero for a negative indicator and thus charge the claimant with the entire markup interest rate. The defendant party claimed that a fixed markup had been agreed. The debit interest would develop towards the agreed indicator. If the indicator rises, the interest rates rise to the same extent and vice versa.

In summary, the Austrian Supreme Court now states that the borrower is not obliged to pay a lower markup at a negative reference interest rate. In addition, the Austrian Supreme Court claimed that neither the wording of the specific credit agreement nor the purpose of the contract shows that the defendant bank can demand at least the markup as debit interest. Such a minimum interest rate would be in contradiction to the actual intention of the parties. The contracting parties have deliberately agreed to divide the risks and opportunities of future fluctuations of the financing costs by binding the borrowing rate to the reference interest rate. 

Source: Supreme Court 

More information:

The bank does not have to pay negative interest to borrowers

The death of the borrower is not reason for sale of the collateral