There’s no need to be so negative

Further falls in rates may actually be a good thing

Earlier this month, the Bank of England gave banks six months’ notice to get operationally ready for negative interest rates.

Here, we take a look at what that could mean for your money…

Why are negative interest rates being considered?

The Bank of England has various tools at its disposal to stimulate a slowing economy, one of which is the interest rate level. Reducing interest rates makes borrowing less expensive and saving less attractive.

That encourages more spending – and when we’re spending more, we’re helping the economy grow quicker.

Negative interest rates are at the extreme end of this scale. The fact they’re being discussed reflects the Bank’s concern about what may happen to the economy when the coronavirus support packages come to an end.

‘‘ The Bank of England is concerned about the economy, post-Covid

Have we ever had negative interest rates before?

Not since the Bank was founded in 1694. But other countries have negative rates – and have had for some time. Denmark, Japan, Sweden, Switzerland and the European Central Bank have all had rates below 0% at some point to encourage retail banks to lend more, rather than leave their funds on deposit with the central bank. When banks lend more, it is thought that the economy can be stimulated – or at least that’s the theory.

How would a negative interest rate affect my mortgage?

If you have a fixed interest rate mortgage you would not be affected. If you’re on a tracker rate, your monthly payment could reduce if it tracks the Bank of England rate – but it’s almost certain your mortgage terms and conditions have a minimum interest rate charge at or above 0%, also referred to as a collar, so it’s unlikely you’ll be paid to borrow money.

The lowest rate we’ve ever seen was -0.75% in Denmark, where some banks offered mortgages with negative interest rates. However, borrowers weren’t paid to take out a mortgage as you might think, after fees were taken into account.

What about loans?

Personal loans are normally charged at a fixed interest rate, rather than a variable one, so most people would see no effect on monthly payments.

But if you have an older loan which is charged at a higher interest rate, you may begin to see cheaper deals which could save you money.

Will savers have to pay banks to hold their money?

A reduction in the Bank’s interest rate – currently 0.1% – would likely see a reduction in the already tiny savings rates at banks and building societies.

I expect them to go to 0%, which effectively would be negative in real terms, taking inflation into account.

However, it’s highly unlikely we would be charged to hold money on deposit because everyday savers would withdraw their funds and keep the cash at home; larger savers would simply invest in low-risk, AAA rated short-term bonds.

For more about interest rates, search for The Money Planner podcast.