Below 0%: what negative interest rates could mean for you and your money

Financial News

In recent months, the coronavirus pandemic has had a significant impact on the UK economy, causing the government to increase its spending to protect workers and businesses. Despite their best efforts, the economy is smaller than it was pre-pandemic and government borrowing has ballooned.

One potential option for helping to solve these problems would be for the Bank of England to introduce negative interest rates. If this happened, it would be the first time the rates had fallen below 0% in the bank’s entire 326-year history.

This would have a considerable impact on the UK economy and could affect many ordinary people too. Read on to find out what negative interest rates could mean for you and your money.

Negative interest rates discourage saving but encourage borrowing

For many years since the 2008 financial crash, UK savers have struggled with low interest rates. In 2020, the Bank of England’s base rate fell to a historic low of 0.1%.

While the bank lowered the rate as a pre-emptive move to protect the economy from the looming threat of the pandemic, it also punished savers.

Essentially, low interest rates encourage people to spend, as the rate of interest is lower than the rate of inflation. This means that over time, the true value of their savings will be eroded.

Lowering interest rates has typically been a good way to promote spending and stimulate economic activity, but with rates at only 0.1%, the Bank of England can’t make them much lower.

Making the rates negative is essentially the same idea, just taken one step further. If the bank did so, savers could be charged a small fee for keeping their money in banks, which should encourage them to spend more.

It could also provide cheap business loans, which would be useful for entrepreneurs looking to start their own companies in the wake of the pandemic.

Charges incurred by banks and building societies may be passed onto you

One possible effect of the Bank of England making the base rate go negative is that banks and building societies may pass the costs onto you.

With negative interest rates, you could be charged for keeping your money in a savings account. This means that keeping your money in cash would be a poor idea, as it would be eroded by both charges and inflation.

Naturally, those with large savings in cash would be most affected by this move.

Before you start to panic, it’s important to bear in mind that some banks in Europe have already implemented this change, so the move would not be unprecedented. According to the Independent, banks in Denmark, Japan, and Sweden already offer negative interest rates.

Negative interest rates could impact your mortgage payments

As the change in the base rate impacts mortgage lenders, the interest rate on your mortgage could change too.

If you have a fixed-rate mortgage deal, there will be no change to your repayments, but if you have a variable- or tracker-rate, you may see a reduction. If your mortgage rate fell below 0%, that would mean the total you owe would decrease each month.

However, according to Money Saving Expert, it may be more likely that mortgage interest rates would fall to 0% for tracker-rate mortgages, rather than going negative.

Bear in mind that some mortgages have a lower “collar” which the interest rate will not fall below. This varies across mortgage deals, so check with your lender to see whether there’s a limit for how far your interest rate can fall.

The Bank of England may choose not to implement negative rates

While the prospect of negative interest rates may be concerning to avid savers, there’s no immediate need to worry as negative rates are only a possibility.

The significant impact that the rates could have on people is why the Bank of England considers them to be a “weapon of last resort” when trying to stimulate the economy.

Some research has even suggested that negative rates may be counterproductive for economic recovery, as they reduce the profitability of private banks. This in turn can prompt them to restrict credit rather than expand it, having a knock-on effect for many businesses.

It is for this reason that the Bank of England is only considering lowering the rates further, rather than announcing an intention to do so. Before making the decision, it’ll have to carefully consider the implications the move could have on the wider economy.

However, if you are concerned at what this may mean for you, you should consider seeking professional advice. A financial adviser can help you to manage your money in such a way that would limit the impact of the change.

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If you’d like to know how negative interest rates could affect your progress towards your financial goals, please contact us. Please email or call 0115 933 8433.