The last decade or so has been a bit lean for investors with interest rates being painfully low and making it almost not worth looking for new investments.  That fact makes it better news for those with mortgages and other significant credit, as they end up paying less for what they have borrowed.  So, it’s no surprise that everyone keeps a healthy eye on interest rates.

The base rate, as it is known, remained stable at 0.5% between the last quarter of 2010, and mid-2016.  At that point, it halved to 0.25%.  A year later, it crept up again, and reach 0.75% by August 2018. Less than two years later, it plummeted again, first to 0.25% and then almost immediately sunk to just 0.1%, where it remains.   However, as COVID continues to sink its teeth into the world’s economies, there is muted talk that interest rates could even go through zero and hit negative values.  It’s all a long way from the days of October 1998, when interest rates stood at an eye-watering 14.88%!!

But what happens if the Bank of England (BoE) decide that the best course of action is to reduce interest rates yet again, and go negative? Interest rates are one of the main tools that the bank has to keep the economy stable and it doesn’t change it lightly.  But with the prospect of the corona virus plunging the world into the deepest recession since the Second World War, the international banks – including the BoE – are having to consider extreme measures to prevent a complete meltdown, and that includes the notion of negative interest rates.

So, what would negative rates actually look like?  Would we be paying banks to look after out money that never grows as an investment?  Would banks pay us to take out loans?  Well, actually, kind of.

Negative interest rates could, theoretically, mean you end up paying a bank to look after your savings while you’re paid to borrow money. However, as banks and building societies also factor in their own profitability and competitiveness when setting rates, this is actually quite unlikely.  The main impact of negative interest rates is likely to be more cash available to invigorate the economy. Instead of paying to leave their excess capital with the central banks, high street banks and building societies will be looking to lend more instead, encouraging more investment and triggering growth in the economy. 

And the same mindset would work for the most part with savers too. With no growth on their investments, savers would be incentivised to pump it back into the economy by spending on items that they might not usually buy, simply because they can. Furthermore, as it would be a cheap option to borrow, individuals and businesses may well put spending and growth plans into action that will help businesses generate an income and get the economy going again. 

With interest rates going negative it would also weaken the country’s currency, which might sound like a bad thing, but it would make exports cheaper, driving up demand from overseas customers, which also helps to fuel economic growth.

But what about mortgages?  Well, if you are in a fixed-rate deal, then you are unlikely to see a change until your deal is up.  If you are in a variable rate or a tracker, then you are likely to see a fall, though not to zero (or even the banks giving you money) as trackers are always a couple of points higher than the base rate anyway.

If you would like more information about how negative interest rate might affect you, come and chat to us at Grange Mortgages, and see how we can help you.