What will negative interest rates mean for my mortgage, savings and investments?

Linda J. Dodson

Will the bank pay me to borrow money? 

The vast majority of mortgages in Britain are taken out on a fixed basis meaning most homeowners would not see their rate change if the Bank Rate were to fall below zero.

The biggest beneficiaries would be those on tracker and variable mortgages. Tracker loans move in line with the Bank Rate and would drop by the corresponding amount.

Banks ofte have a “collar” or “floor” clause written into these mortgages. This means that rates cannot fall below a set point. For example, tracker mortgages agreed by Nationwide since 2009 state that the interest rate cannot drop below 0pc, regardless of the Bank Rate.

Variable-rate loans, including lenders’ standard variable rates, are not guaranteed to fall in the same way but in practice a significant fall or rise in the Bank Rate will be passed on to consumers. These may have clauses which state they will not fall below zero.

Consumers can take advantage of negative interest by choosing a tracker loan today as repayments may fall should the Bank Rate turn negative.

However, tracker mortgages are not necessarily cheaper than fixed-rate loans. The lowest fixed rate today is available from the West Bromwich Building Society and charges 1.24pc. By comparison, Barclays has the lowest tracker-rate at 1.54pc, which is 1.44 percentage points above Bank Rate.

Will the bank charge me to save? 

The whole idea of low rates and negative rates is to get businesses borrowing via a big enough incentive to not hoard cash. But in reality, when it comes to consumers, banks are never going to ask a saver to pay it interest for an account.

Banks need our savings deposits so they have cash – known as liquidity – to lend. After all, what is to stop us from piling up our cash under our mattresses or going out and buying a safe and keeping our money locked away at home?

This poses a massive security risk and is something law makers and regulators would never allow to happen. What is more likely is that savings deals will continue to fall, but not past zero.

Banks will likely recoup some of the cost of maintaining deals in positive territory by upping charges on other accounts and making deals more expensive in other parts of their businesses.

Those looking to lock in a savings deal with a fixed-bond account or similar should not wait, as there is little prospect of rates increasing any time soon.

The best one and two-year fixed-bond accounts on offer today are both from Paragon, paying 1.3pc and 1.35pc respectively.

The best three and five-year fixes are from UBL and pay 1.4pc and 1.5pc. The best easy-access account is from the Government-backed provider NS&I, paying 1.16pc via its income bonds.

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