What would negative interest rates mean for mortgages and savings?

Variable-rate mortgages may fall a little, and it seems unlikely banks will charge to hold savings

Hilary Osborne THE GUARDIAN Thu 21 May 2020
 

You will need to dig out your paperwork to see how low your mortgage rate could go. Photograph: Joe Giddens/PA
The governor of the Bank of England, Andrew Bailey, has paved the way for negative interest rates, saying officials are actively considering all options to prop up the economy.

The Bank’s base rate stands at 0.1%, the lowest level on record, so it would not take much to take it into negative territory. The UK would not be the first country to have a negative rate at its central bank – Japan and Sweden are among those that have done so.

What happens to my mortgage?

If it’s a fixed-rate mortgage, nothing. And most households are on this type of deal – in recent years around nine in 10 new mortgages have been taken on a fixed rate.

If it is a variable-rate mortgage – a tracker, or a mortgage on or linked to a lender’s standard variable rate – the rate could fall a little if the base rate is cut. But the drop is likely to be limited by terms and conditions. David Hollingworth, of the mortgage brokers London & Country, says trackers sold very recently have in some cases had a “collar” that prevents the lender from having to cut the rate at all. Skipton building society, for example, has a tracker at 1.29 percentage points above the base rate that can only go up.

Older mortgages often have a minimum rate specified in the small print. Nationwide building society, for example, will never reduce the rate it tracks below 0% – so if your mortgage is at base rate plus 1 percentage points, it will never fall below 1%. Santander specifies in some mortgages that the lowest rate it will ever charge is 0.0001%.

You will need to dig out your paperwork to see how low your mortgage rate could go.

Will new mortgages be free?

In Denmark, mortgages with negative interest rates went on sale last year. Borrowers with Jyske Bank were lent money at a rate of -0.5%, which meant the sum they owed fell each month by more than the sum they had repaid. There is no reason why UK lenders could not follow suit, although so far there is no sign that any will.

In the meantime, fixed-rate mortgages are getting cheaper and may continue to fall in price. Big lenders including HSBC and Barclays have reduced fixed-rates this week and more may follow. Hollingworth says borrowers now have a choice of five-year fixed rates below 1.5%, with HSBC’s deal now at 1.39%.

Tracker mortgages have been pulled and repriced with larger margins, to cushion lenders against falling rates. If rates are cut again, expect more of that, as well as the collars already seen on some deals.

A negative base rate means banks and building societies have to pay to keep money on deposit, and it is designed to discourage them from doing so and make them keen to lend.

Fears over what might happen to property prices mean they are still likely to lend very carefully, but they should not need to restrict the range and number of mortgages on offer. Some lenders that reduced their maximum mortgages while they were unable to do valuations have started to offer loans on smaller deposits, although the choice of 90% loans is very limited. “Lenders do have appetite to lend,” says Hollingworth.



What happens to my savings?

Savings rates have already been hit by the two base rate cuts in March and most easy-access accounts from high street banks are already paying just 0.1% in interest.

Andrew Hagger, the founder of the financial information website Moneycomms, says he thinks it is unlikely banks will start charging people to hold their everyday savings. “Many would just withdraw cash and possibly keep it in the house, thus opening a can of worms around security and break-ins,” he says. “However, if the Bank of England did introduce negative rates, I’m sure we would see even more savings accounts heading towards zero.”

Rachel Springall, from the data firm Moneyfacts, says: “The most flexible savings accounts could face further cuts should base rate move any lower or if savings providers decide they want to deter deposits.”

She is not ruling out a charge for deposits. “Some savings accounts could go down this path – similar to how some banks charge a fee on a current account,” she says.

Wealthy savers are likely to be the first who would face a charge. Last year UBS started charging its ultra-rich clients a fee for cash savings of more than €500,000 (£449,000), starting at 0.6% a year and rising to 0.75% on larger deposits. And at the Danish Jyske Bank, similar charges apply.

“It could be that super-rich clients in the UK get charged a similar fee as the commercial banks may wish to discourage large cash holdings which they are having to pay for,” says Hagger.

What about loans and credit cards?

Personal loan rates are already low and are usually fixed, so you will not see your monthly repayments fall if rates go down. Credit card rates are usually low for new customers, but rise far above the base rate once introductory periods have ended, so will not be anywhere close to falling into negative territory.

Hagger says he does not expect card or loan rates to plummet in the near future, “as I think banks will continue to tighten their credit underwriting – I think they’ll be more concerned about rising bad debt levels due to a surge in unemployment, for the remainder of 2020 at least.”

This month Virgin Money closed the credit card accounts of 32,000 borrowers after carrying out “routine affordability checks”. It later reversed the decision, but this could be a sign that lenders are reviewing their customer bases and trying to reduce their risk.