What Negative Interest Rates Mean For Landlords
Negative interest rates are on the Bank of England’s agenda as a tool for stimulating the economy. The BoE has already written to the banking industry asking if they are ready to implement the policy.
Negative interest rates are when the official bank rate set by the BoE falls below zero. Rate setters sitting on the BoE Monetary Policy Committee are thinking about imposing a negative rate from December 17 The policy is designed to penalise savers and businesses that build set aside cash by making them pay to keep their money in the bank. Instead, the BoE wants savers to spend on goods and services to boost the economy and for businesses to invest for growth to generate new jobs.
What is a negative interest rate?
Britain has lots of interest rates. The BoE sets the official bank or base rate, but financial firms are free to set their rates.
That’s why credit agreements often quote a ‘bank rate plus’, like bank rate plus 0.5%, which is a rate of 0.6%. That figure means the financial firm is charging BoE's official interest rate plus the financial firm’s margin.
The BoE base rate shows the interest rate the central bank pays to other financial institutions for holding their money on account and how much the BoE charges for lending money to other banks.
The unofficial rates are set by banks, building societies and finance houses. These rates set the mortgage rate a borrower pays, or how much interest a saver receives on cash in the bank. The general rule is the Bank of England cuts rates to signal savers and businesses to spend. On March 1, 2020, the Bank of England set the lowest official rate ever of 0.1%. The UK official interest rate has never dropped to lower than the current rate, so negative interest rates are uncharted waters for the economy.
Negative interest rates and borrowing costs
Interest is the cost of borrowing money. A positive interest rate of 3% on a £100 loan for two years means a borrower pays the lender £3 a year plus the loan amount – a total of £106. A negative rate of -3% represents a borrower is paid £3 a year by the lender, owing the bank £94 after two years.
Do negative interest rates work?
Reducing interest rates is a central bank tool for encouraging borrowing and spending with an eye on pushing up inflation and wages. Foreign governments have tried negative interest rates as an economic tool several times.
Switzerland, Japan, Sweden, and the Eurozone have all had a go, but the evidence suggests negative interest rates do not bolster the economy. A quick look at central bank base rates puts the UK at 0.1%, Sweden at zero, Japan at -0.1%, the Eurozone has moved back to zero, and Switzerland at -0.75%.
How negative rates impact landlords
The BoE needs to tackle the problem of compensating banks for charging them to hold their money.
The charge will eat into bank profits and they are likely to look elsewhere to fill the hole. The intention is banks should pass on the rate cut by giving savers and borrowers a negative rate as well. But in country’s where the policy is already in place, the banks have raised charges or reduced borrowing to lessen the impact of negative interest rates on their balance sheets – the opposite effect to what the BoE wants to instil.
The big question from landlords is will the lender give them a negative mortgage interest rate? The answer is probably no for two reasons. Firstly, most mortgage contracts have a minimum positive rate written into the terms and conditions regardless of where the BoE interest rate sits. If the rate falls to zero or below, the minimum rate set by the lender kicks in.
This rate is called the collar rate. If the collar rate is 1.25%, that is the lowest rate the borrower would pay regardless of how low the official bank rate falls. This applies to tracker and standard rate mortgages. Fixed-rate deals are just that and are unlikely to change if the rate drops further.
Negative interest rates FAQ
Negative interest rates are a tool for boosting spending – but savers and borrowers are unlikely to see a big difference in their finances if the Bank of England decides to introduce the policy.
What is a negative interest rate?
A negative interest rate is when the BoE sets the official base rate below zero, like the -0.1% rate in Japan.
Is the rate negative in the UK?
No. The Bank of England base rate has floated just above zero for several years, but always stayed positive since introduction in 1694.
Do negative interest rates affect credit cards?
Most credit cards have interest rates much higher than the BoE official rate, and it's doubtful that rates will change much if the official rate falls red. The best way of reducing credit card charges is to transfer to a 0% card.
Will the bank pay savers or borrowers if interest rates go negative?
This isn't very likely. Most banks already have collared rates that kick in when mortgage, loan or credit card rates fall to zero or below to protect their profit margins. Collared rates are the minimum borrowers will pay. Saving rates for ordinary borrowers could go negative, but in other countries the negative rate only applies to commercial borrowing.
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