INTEREST RATES AND YOUR MORTGAGE

Could the RBA realistically drop the official interest rate below 0 per cent? Here’s what it could mean if it did

IMAGINE taking out a home loan, and the bank pays you interest to borrow from them.

That’s some seriously crazy, brain-bending stuff. And yet talk of negative interest rates for Aussie borrowers and savers has been bubbling recently, even though the Reserve Bank of Australia (RBA) says such a move would be highly unlikely.

Our official interest rate, set by the RBA, currently sits at 0.1 per cent so there’s not much wiggle room to go lower if it needs to give the economy another Covid-fighting shot in the arm.

The RBA uses interest rates as a lever to keep inflation under control – raising rates to slow down spending and prices, or lowering to stimulate spending and inflation by enabling home loans and other debts to be offered cheaply.

If the latest Covid-19 lockdowns hurt the economy badly and spur a wave of business failures and personal bankruptcies, it’s conceivable that the RBA could lower its official cash rate to zero or even into negative territory.

This could lead to borrowers having to pay a bank to have money in deposit accounts, and mortgages where banks pay borrowers to lend them cash.

I personally don’t think we’ll get that far, given how quickly we bounced back from the pandemic’s first and second waves, and how we’re motoring towards vaccination targets that will end lockdowns.

But some economists and analysts have warned it’s a big possibility, and negative interest rates are not unprecedented elsewhere in the world.

Borrowers in European countries such as Denmark and Switzerland have been getting paid interest to have mortgages for several years.

They’re still paying off their home loan principal but get a small extra payment each month courtesy of the negative interest rate.

The big losers from negative rates are savers. And they’re not happy in Denmark where some are having to pay banks interest for holding deposits of about $20,000 or more.

One wonders how many stashes of cash are buried in gardens or hidden under beds over there.

Deposit account rates in Japan and Switzerland are also in negative territory.

Savers and retirees in Australia have suffered for years with interest rates on their bank deposits that are already close to zero, and become negative when they pay i ncome tax on their i nterest earned.

We’re still a while away from negative rates in Australia, because the RBA would have to cut deeper into negative territory for it to flow through to borrowers.

Today the cash rate is 0.1 per cent but most people are paying 2 per cent or more in mortgage interest, because banks still need to make a profit.

But what we do look like having is lower rates for longer.

Before the latest round of Covid lockdowns, economists had expected interest rates to start rising at some point next year.

Those forecasts are being pushed back beyond mid-2023. Negative rates or not, it’s party time for borrowers for a few years yet.

If the latest Covid lockdowns hurt the economy badly and spur a wave of business failures and personal bankruptcies, it’s conceivable that the RBA could lower its official cash rate to zero or even into negative territory