What are negative interest rates, and what does it mean for you?

Back in March, the Bank of England reduced interest rates to the lowest level in the Bank’s 326-year history. The Base rate was cut to just 0.1% as part of a package of measures designed to support the UK economy through the coronavirus crisis.

In recent weeks, the new governor, Andrew Bailey, has hinted that the Bank could decide to employ negative interest rates and to cut the cost of borrowing to below zero.

Bailey has said that central bank officials were actively considering all options to help see the economy through a deep recession, and it comes after Britain sold a government bond with a negative yield for the first time.

So, what are negative interest rates? And what does it mean for your mortgage and savings?

What are negative interest rates?

One of the roles of the Bank of England is to act as a ‘bank for banks’ in that institutions keep some excess money there. It traditionally pays interest on the deposits that banks keep with it.

This interest rate, known as the Bank/Base rate in the UK ( or ‘deposit rate’ in the Eurozone) influences the cost of bank lending throughout the economy. Lower rates therefore stimulate more lending, as it becomes cheaper to borrow money.

This is not unusual elsewhere in the world. The European Central Bank’s (ECB) deposit rate is currently -0.5%. Interest rates are also negative in Sweden, Switzerland, Denmark and Japan.

If the Bank were to cut the Base rate from 0.1% and move into negative territory, banks would be charged a small amount for keeping their money with their country’s central bank.

It also means that investors have to pay to lend money to fund the government’s response to the Covid-19 pandemic. Essentially, if investors want a safe haven for their money, they will buy gilts knowing they would get back less than they paid for them when the bonds mature in three years’ time. This encourages spending and discourages saving.

This has happened in the UK in the last few weeks. A recent £3.8 billion gilt auction by the debt management office (DMO) sold three-year government bonds with a yield, which indicates the interest paid, of -0.003%.

What happens to my savings?

In recent years, savers have been hit hard by low interest rates. The two recent Base rate cuts have compounded this misery, with many easy-access savings accounts now paying 0.1% interest or lower.

While the Bank of England could turn to negative interest rates, some experts believe it is unlikely that banks and building societies will start to charge you to hold your everyday savings.

Andrew Hagger, the founder of the financial information website Moneycomms, says: “Many would just withdraw cash and possibly keep it in the house, thus opening a can of worms around security and break-ins. However, if the Bank of England did introduce negative rates, I’m sure we would see even more savings accounts heading towards zero.”

However, there are others who think that it is possible that banks will introduce a charge for deposits. Rachel Springall, from the data firm Moneyfacts, says: “The most flexible savings accounts could face further cuts should base rate move any lower or if savings providers decide they want to deter deposits.

“Some savings accounts could go down this path – similar to how some banks charge a fee on a current account,” she says.

Savers with large sums are likely to be the first people to face a charge. In 2019, UBS started charging its high net worth clients a fee for cash savings of more than €500,000 (£449,000), starting at 0.6% a year and rising to 0.75% on larger deposits. Similar charges apply at the Danish Jyske Bank.

“It could be that super-rich clients in the UK get charged a similar fee as the commercial banks may wish to discourage large cash holdings which they are having to pay for,” says Hagger.

What happens to my mortgage?

In recent years, around 90% of all mortgages have been taken on a fixed rate. So, if your mortgage is on a fixed rate, you won’t see any change to your repayments.

If you have a Base rate tracker mortgage, or your home loan is linked to your lender’s Standard Variable Rate (SVR) then you may see your repayments fall if the Base rate is cut.

However, most mortgages will have a ‘collar’ that means the terms and conditions will prevent your interest rate from falling below a certain amount. For example, Skipton Building Society has a tracker at 1.29% above the Base rate that can only go up.

Nationwide – one of the UK’s largest lenders – has a clause that it will never reduce the rate it tracks below 0%. This means that if your mortgage is at Base rate plus 1%, the rate you pay will never fall below 1%.

If you are looking for a new mortgage, there is an outside chance that you could end up paying negative interest rates.

In Denmark, mortgages with negative interest rates went on sale in 2019. Borrowers with Jyske Bank were lent money at a rate of -0.5%, which meant the sum they owed fell each month by more than the sum they had repaid.

Even if rates do not tip into negative territory, fixed-rate mortgages have been getting cheaper in recent weeks. It’s now possible to fix your mortgage for five years at less than 1.5%, a deal which mortgage expert Mark Harris told the Telegraph offered ‘extraordinary value’.

Get in touch

If you have any questions about what negative interest rates might mean for you, please get in touch. Email info@henwoodcourt.co.uk or call 0121 313 1370.

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