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What would a negative interest rate mean for UK consumers?

Hilary Osborne
·4-min read
<span>Photograph: Joe Doylem/Alamy</span>
Photograph: Joe Doylem/Alamy

The Bank of England has voted to keep interest rates on hold at 0.1%, but the continuing Covid-19 pandemic makes the outlook for the economy very uncertain and the Bank is considering the pros and cons of taking the UK into negative interest rate territory for the first time.

What would happen to my mortgage?

If it’s a fixed-rate mortgage, a cut in interest rates would mean no change. Most households are on this type of deal – in recent years about nine in 10 new mortgages have been taken on a fixed rate.

Related: Bank of England says UK economy recovering faster than first feared

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. 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% on mortgages arranged since 2009 – so if your mortgage is at base rate plus 1 percentage point, 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 have been edging up in price but are still historically cheap. Big lenders including Natwest and HSBC both offer five-year fixed rates below 1.5%, if you have a large deposit, and you can fix over two years at less than 1.2%.

The cheapest tracker mortgages from earlier in the year 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.

Fear over the property market and jobs mean lenders have started to look more closely at mortgage applications, and have made it harder to borrow with a low deposit. Nationwide, for example, has added a raft of terms and conditions on its 90% mortgage, including limiting how much of the deposit can be gifted by family or friends.

What happens to my savings?

Savings rates have already been hit by the two base rate cuts in March and some easy-access accounts from high street banks are already paying just 0.o1% in interest.

Some banks already charge for current accounts, but there is some way to go before you are forced to pay to keep small sums on deposit. At the moment, National Savings and Investments is still recruiting savers, and has an account paying monthly interest equivalent to 1.15% a year.

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.

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. You can borrow £7,500 at a rate of 2.8% currently.

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.