What Negative Interest Rates Would Mean For Mortgage Holders?


With an increasing level of discussion about negative interest rates, it is important mortgage holders and prospective buyers understand what this would mean for them.

The base rate set by the Bank of England is currently held at 0.1%. This figure represents a historic low, but with many economic challenges in the UK, industry experts believe the Bank of England might opt for a negative base rate.

A negative interest rate encourages people to spend

When the base rate is negative, commercial banks have to pay for cash deposits they hold. This could create a situation where savers have to pay for saving money while people with a variable rate mortgage could actually be owed money by their lender.

The reality of the situation is, as you would expect, slightly different. Mortgage holders with this style of mortgage shouldn’t expect any money back or any additional benefit, other than not having to pay interest.

There will of course be other fees and charges associated with mortgage, but many borrowers will pay less for their mortgage.

The reason negative interest rates occur is to stimulate spending. If people are penalised for saving money, it is likely many will choose to spend their money instead. In turn, this will drive economic activity.

Fixed-rate mortgage holders might miss out

While variable rate mortgage holders will hopefully have lower monthly payments, fixed rate mortgage holders will not benefit in this way. However, this is a risk associated with fixed-rate mortgages, and many holders will be okay with this outcome.

The key benefit of a fixed-rate mortgage is that the amount you pay each month is fixed. This allows mortgage holders to budget accordingly. With many people being risk averse, this style of mortgage is popular, even if it means holders miss out on some benefits if interest rates are lowered.

In these circumstances, fixed-rate mortgage holders will feel annoyed at missing out on the benefit. Of course, these mortgage holders benefit from consistency, and being able to budget accordingly.

Some mortgage holders are risk-averse, which means a fixed-rate mortgage is of benefit to them.

Kevin Brown is a savings specialist at Scottish Friendly, and he said; “The prospect of the Bank of England coming to the rescue of the nation’s hard-pressed savers remains a long way off, with today’s announcement possibly paving the way for negative interest rates in the coming months. Although the steep drop in inflation in August means there is temporarily more choice for savers looking for inflation-beating returns, this period is likely to be short lived. The cash savings market in the UK is beyond repair while the prospects for the UK economy remain so uncertain.”

Rachel Winter of Killik & Co, said: “The rumours of negative interest rates continue to rumble on but, in welcome news for UK savers, they are yet to become a reality. However, there remains the prospect of significant job losses when the furlough scheme comes to end next month which will inevitably put further pressure on household finances, so the possibility of lower rates in future cannot be ruled out.  As we have seen over the past decade, lower interest rates can have the effect of enticing more savers into the stock market as they seek to earn a return on their savings.”

While there are new challenges to overcome in the housing market, people shouldn’t consider arranging a mortgage to be an impossible task. However, it is vital people accept help and assistance from professionals in the field. If you are keen to arrange a mortgage, speak to a mortgage broker or experienced adviser and make sure you are fully equipped to make an informed decision.

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