Your Mortgage and Negative Interest Rates:
People are starting to talk about ‘Negative Interest rates.’ This comes as little surprise really. The Bank of England’s base rate has fallen to a historic 0.1% low, so something has to be done. Previously, the Governor of the Bank of England has steered clear of taking drastic measures. But, in these turbulent financial times, nothing can be ruled out as a viable option for kickstarting the economy. So, what do negative interests mean for you. And, most importantly, what happens to your mortgage if there are negative interest rates?
Where are we at?
As a result of inflation dropping from 1.5 per cent in March to a four-year low of 0.8% in April, the Bank is under increasing pressure to push interest rates below zero. While low inflation may sound good, it comes with huge potential to suppress economic growth. And where economic growth is stunted, wage increases get stalled.
Usually, the Bank aims to float inflation around the 2% mark. However, none of us can ignore the fact that lockdown has had a severe economic impact. So, it looks likely that inflation will stay low for the foreseeable future.
How do negative interest rates work?
Negative interest rates work by requiring anyone wanting to deposit money with the Bank of England being charged a fee to do so. So, high street banks would effectively get charged for storing money. They would therefore rather lend money to households and businesses and earn at least some interest, as opposed to being charged to store money at the Central Bank.
The hope is that negative interest rates will stimulate ‘buying.’ For those toying with the idea of moving house, for example, negative interest rates could well be the push they need to make the jump.
What impact do negative interest rates have?
The European Central Bank and Japan have already modelled how negative interest rates work for us. Typically, the Bank will lower interest rates when a threat of recession is imminent. In doing so, they are hoping to encourage levels of borrowing and spending that will stimulate the economy.
The reality of the situation though suggests that, in practice, negative interest rates have limited effectiveness in encouraging spending and investment for the long-term. They also do very little to encourage companies to keep a cash reserve. And, as the recent pandemic has shown, this can be make or break when it comes to a business successfully pulling through a crisis.
So, while negative interest rates may seem generally appealing, they remain a controversial choice. And that’s why the Bank of England will be tentative around the issue. Any move to implement negative interest rates will be (quite rightly) regarded as a last resort, rather than a go-to solution.
What do negative interest rates mean for your mortgage?
Fixed-rate mortgages are the most common type of mortgage. As they are ‘fixed,’ negative interest rates would have no bearing on them. So, if you have a fixed mortgage rate, your mortgage will not be affected.
For those who have a variable rate mortgage that tracks the standard variable rate of the bank that made the loan, your mortgage could fall a little if the base rate is cut. This is also true for those with tracker mortgages, as these too follow the Bank of England base rate.
It’s worth pointing out though that any drop would be wrapped up in a litany of terms and conditions, and may mean that the impact on your mortgage is not quite as attractive as it first appeared.
The majority of tracker mortgages today include a ‘collar’ that stops the lender from having to cut the rate at all. So, do check your paperwork before celebrating. You’ll need to establish whether your lender has specified the lowest rate it would ever charge before you’ll know just how far you are impacted.
Could new mortgages be free?
Currently, in the UK, fixed-term mortgages are falling in price. Meanwhile, some tracker mortgages have been withdrawn and re-priced with larger margins in a bid to protect lenders against falling rates. So, while the concept of new mortgages being free is lovely, it won’t be on the cards any time soon.
That being said, it’s not impossible! Denmark has already shown just how viable it is. The rate, last year, for borrowers at Jyske Bank was -0.5%. This meant that the total sum borrowers owed each month fell by more than the sum they had repaid! It’s the stuff of dreams, isn’t it? So, as you might imagine, the UK is a way off that yet… but it’s nice to think about! You just never know what the future might hold.
As always, if you would like to speak to a financial adviser, please do call us on 01243 767 469. Alternatively, you can email us from our contact page, and an adviser will be in touch.
Written by Alex Welsh
Alex is a Resolution-accredited, Chartered financial adviser. Having joined the firm in 2012, he has extensive knowledge of all areas of financial planning.