Negative interest rates – what are they and what would they mean?
You may have heard that the UK economy is in recession. You may have heard talk about negative interest rates being introduced in response to that. You may be wondering what any of that actually means. Well, wonder no more because we’re here to help you out. Here is our guide to negative interest rates.
The Bank of England recently asked lenders how they would adapt to a negative base rate. This is because the Bank of England is the UK’s central bank. It sets the national interest rate, also known as the base rate, and this is applied to high street lenders and the money they store with the central bank. This is not the first time that negative interest rates have been explored and we reckon it won’t be the last, but it has been suggested this time in response to coronavirus.
A high interest rate is often introduced when the economy is growing and means that banks, and their customers, are paid interest on their money. This encourages saving. The reverse, negative interest rates, removes the incentive to save and encourages spending. This gives the economy a boost when it’s in recession and not growing.
Or at least, that’s the theory. If customers are charged for their savings and respond by taking their cash out and putting it under the mattress, then both beds and the economy could get bumpy. That’s why it is unlikely, although not unheard of, that banks would charge customers for their savings.
Negative interest rates have been introduced in other countries, for example Sweden, and their success is being debated by economists. So we aren’t going to dive into whether they’re a good idea or not. We’ll leave that to the experts. Instead, we’ll stick to what we know best – mortgages.
The impact of negative interest rates on your mortgage depends on the kind of mortgage you have. If you have a fixed rate option (where you pay the same amount every month) then your repayments won’t change.
However, if you have a tracker mortgage you could end up paying less each month! Don’t get too excited though, it’s unlikely you’ll stop paying interest completely, or that the bank will start paying you. Most banks set their variable rate higher than the base rate, so the interest you pay on your mortgage will be higher than the rate set by the Bank of England. Most lenders also won’t let their variable rate fall below a certain point, regardless of the base rate. So, get out your magnifying glass and check the fine print on your paperwork.
If you would like to know more about what could happen to your mortgage, then speak to your adviser.