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28th October 2020 - Alicia Buckingham

Negative Interest Rates – why should I be interested?

Interest rates rumoured to turn negative are currently being overshadowed by the news that the Oxford Covid-19 vaccine could be ready by Christmas. You may also hope that it will be a magical cure for our economy. However, it is highly unlikely that a vaccine will be able to fix our country’s current economic difficulties. Especially when considering the limited or tiered distributions of the vaccine; the likely delays and lack of confidence in the results; along with the UK being heavily influenced by the global market.

Therefore, talks of negative interest rates should not be overlooked. The Bank of England is already contacting high street lenders to ask them if their systems are ready to cope with negative rates. So, what exactly does this mean for you?

Firstly, what are negative interest rates?

As a saver, you would usually expect to receive some (positive) interest for holding your money with a bank. Interest rates have not exactly been life changing in the recent past, but it has been possible to pick up around 1% per annum.

With negative interest rates, the goal is to get people spending instead of saving to stimulate the economy. This will also encourage banks to lend money to businesses and individuals.  To do this, banks will get charged by their central banks for holding money. So, instead of receiving interest, it is likely savers could have to pay it. However, even if you are not charged for your cash, as interest rates will likely be lower than inflation, you would still technically be losing money in real terms.  

Shares and Investments

One of the easiest ways to protect your cash from negative interest rates is to invest some of it. Shares, and share-backed vehicles, have historically been one of the best performing asset classes over the long term. An investor can utilise Stocks and Shares ISAs for tax advantages and invest for the potential of growth in the long-term. Holding low-volatility stock can diversify and provide an element of preservation in the event of a second market crash. If this is the route savers decide to go, it could serve as a tailwind for the stock market. It could also potentially provide a profit for those early investors.

Borrowing

As negative interest rate policy is transmitted through private banks, they have the power to decide whether, or how, to pass it on to borrowers. It is therefore not a guarantee that new borrowers will benefit from negative rates either in the form of a lump sum paid off of their borrowings or a bonus, in fact, this is rarely done. Moreover, it will take a while for low mortgage rates to affect existing borrowers. A fixed rate mortgage will stay the same until your deal ends, regardless of what happens to interest rates. A tracker mortgage, tracking the Bank of England base rate plus a set percentage, will be affected. However, trackers and even variable-rate mortgages will often have a minimum below which the rate cannot fall.

The effects of negative interest rates on borrowings are therefore limited. So, how much will negative rates really affect the property market?

Property

Property prices may be expected to take a dive in the near future, with the temporary relief on Stamp Duty Land Tax ending in March 2021. Along with the general understanding that if you haven’t put in an offer on a property by Christmas you are likely to miss the boat on this.

Therefore, property, with its historic potential for substantial growth, could be where people start to think of putting their money to protect against negative interest rates.

However, we have already been shown that negative interest rates won’t mean that it is easier to borrow. It is also important to remember that property is heavily influenced by many factors, including supply and demand.

Swingeing tax and regulatory changes on second homes, and general lack of confidence, may slow the market down considerably. As such, the substantial growth property owners have experienced in the past just might not be feasible in the current climate. Negative interest rates may hold up the market and prevent a crash, but is unlikely to cause a market boom.

Should you wish to discuss the above article with one of our Financial Planners, please feel free to contact us here.

Further reading is available at:

Negative interest rates: what are they for and what would they mean for you?

What would negative interest rates mean for your mortgage?

How Interest Rates Affect Property Values

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