The coronavirus crisis has cost the UK government more than £280 billion to date, according to its own spending review published last month. The extended furlough scheme, as well as support packages and grants for Tier 3 businesses, continue to stretch the government purse.
In its Monetary Policy Report for November, the Bank of England opted to keep interest rates at the historic low of 0.1%. It also announced a further £150 billion of quantitative easing.
The Bank of England has not yet ruled out the introduction of negative interest rates and a review into banks’ readiness to cope with such a measure is ongoing.
But what are negative interest rates? And what do they mean for your finances?
Negative interest rates encourage lending by charging interest on deposits and savings
Dr Nikolaos Antypas, a Finance Lecturer at Henley Business School, recently told the Independent that “Modern societies have been built around the notion of positive inflation” and that “switching from an inflationary to a deflationary regime upends the foundation of modern economics.”
So why is the Bank of England considering such a move?
Back in March, the BBC reported the worst day for global markets since 1987. In the second quarter of the year, UK GDP shrank by 20%.
The economic downturn alongside the effects of the original lockdown and tier restrictions have left many struggling to make ends meet. Job insecurity, business closures during lockdown, and general economic uncertainty can stop us from spending.
Negative rates tackle this issue by making it more expensive for you (and your bank) to hold onto your money.
For high street banks, negative rates would mean that instead of receiving interest on deposits they made to the Bank of England, they would instead face a charge for keeping money with the central bank.
The hope is that this discourages deposits and savings, effectively forcing banks to lend and thereby stimulating the economy.
Theoretically, this could mean that rather than receiving interest on the money in your account, you are charged by your bank for keeping your cash with them. In reality, your bank will be reluctant to pass negative rates onto you, even if it squeezes their profit margins.
While there is no guarantee that the Bank of England will move to negative rates, other countries – including Japan, Switzerland, and Denmark – have already opted for the measure.
What would negative rates mean for my savings?
Times have been tough for savers since the 2008 financial crisis. The coronavirus pandemic has only made matters worse, causing saving account interest rates to reduce further.
Negative rates could mean your bank charges you for holding savings with them. As we have seen, this is unlikely to happen in practice, but you might still want to look into other options for your savings.
One option is to withdraw all your money, but the ‘under the mattress’ approach is by no means the safest.
A far better option might be to move your savings into a UK-based, fixed-rate savings account. These guarantee interest at an amount set when you take out the product (although there may be a minimum deposit too).
This keeps your money within a financial institution and means you’ll still benefit from the protection of the Financial Services Compensation Scheme (FSCS), protection not offered to money held outside of the banking system.
The FSCS guarantees to protect the first £85,000 of your savings, should the bank or financial institution collapse.
A fixed-rate savings account gives you protection, as well as tax-free interest at the agreed rate.
What would negative rates mean for my mortgage?
In theory, if you have a mortgage with a negative interest rate, your lender will pay you to borrow money. That means that over the term, you’ll end up paying back less than you borrowed.
In reality, the majority of recent UK mortgages will have been on fixed rates. They are therefore unaffected by any change to the Bank of England Base rate.
If you have a tracker mortgage – one that tracks the Base rate – or are on your lender’s Standard Variable Rate (SVR) you might see a reduction in your payments.
Your mortgage agreement’s small print could include a minimum rate, known as a collar, which specifies the lowest rate that can be charged. Moneyfacts research conducted last year found that nearly one in ten tracker mortgages had such a collar. If you’re not sure whether your mortgage includes a collar, check with your lender.
Get in touch
It remains to be seen whether the Bank of England will follow Europe and Japan into negative interest rate territory.
If it does, you might see your mortgage payments fall.
Although theoretically possible, it is unlikely that your bank will begin charging you interest on your savings. Not passing negative rates on to you will harm your bank’s profitability and this will be one of the factors the Bank of England weighs up before making a decision.
If you’re concerned about the possibility of negative rates get in touch and we can help formulate a plan that works for you. To discuss the impact of negative rates on your finances, please email hello@fingerprintfp.co.uk or call 03452 100 100.
