How To Make Money Off Negative Interest Rates

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The Bank's monetary policy committee (MPC) held the base rate at a record low of 0.1% in November despite expectations that inflation will hit 5% in April 2022.

But it was only back in early 2021 when banks and building societies where readying themselves for the possibility of negative interest rates "at any point after six months".

In this article, we explain:

What negative interest rates would mean for your finances
How likely it is that the Bank of England would reduce rates
Why some experts thought that negative rates could be a possibility

Thoughts of negative rates

In the minutes of the MPC's February meeting it said: "While the Committee was clear that it did not wish to send any signal that it intended to set a negative bank rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future."

This comes after a speech given in January by Silvana Tenreyro, a member of the MPC, about how negative rates have worked in other countries – and how they could work in the UK, both for borrowers and savers.

Myron Jobson, personal finance campaigner from Interactive Investor, said at the time: "It is clear from the Bank's tone that preparedness does not necessarily mean negative rates are on the cards, nevertheless, even the preparations will be enough to worry savers."

Inflation crept up on everyone during 2021 and now the only way looks to be up for the Bank of England, but what if things had been different.

Find out more: When will interest rates rise?

Unprecedented move

Turning interest rates negative would be unprecedented in this country. It would mean rates dropping below zero – so in theory, savers could be charged to hold money with a bank or building society, and mortgage customers would in effect be paid interest by their lender.

There are several reasons why the Bank was looking at negative rates – and why some economists believed at the start of 2021 that it could happen as early as this spring.

Pressure from the third national lockdown on the UK economy
The uncertain outlook of the coronavirus vaccine roll-out
Fears of mass unemployment when the furlough scheme wound down
Many companies struggling to stay afloat

Normally when an economy is sluggish, central banks cut interest rates to encourage consumers to spend and businesses to borrow to stimulate economic growth.

However, with the Bank base rate already at a rock bottom level at 0.1%, there isn't much further to go – unless rates turned negative.

We look at how negative interest rates could affect your mortgage, credit card, personal loan, overdraft and savings.

Find out more: RPI vs CPI inflation: what's the difference?

What would negative rates mean for: Mortgages?

Gerard Boon, of mortgage broker Boon Brokers, says the base rate falling below zero would be immediate good news for anyone looking to take out a mortgage or to remortgage.

"It will result in a reduction in interest rates across the board for mortgage products in the short term."

Tracker mortgages

It is worth noting that negative interest rates would lead to some borrowers being on lower – but not negative – mortgage rates. In Britain, even tracker mortgages, which are linked to movements in the base rate, have their costs set at the base rate plus a certain percentage charged by the lender.

For example, with the base rate at 0.1% and with a lender offering, say, a 1% interest rate on top, the borrower's mortgage rate would be 1.1%. If the base rate were to fall to minus 0.25%, the rate on the tracker mortgage would be 0.75%.

While that isn't free money for the borrower, it still means lower monthly payments.

"[If the base rate turned negative] lenders may remove various tracker interest rates from the market. However, if trackers are still available, they will certainly be very attractive to borrowers," says Boon.

Standard variable rates

For those on standard variable rates, there is no guarantee of a fall in the same way – it is up to the lender.

In practice, however, a significant fall or rise in the base rate is typically passed on, to some extent, to borrowers. These type of mortgages may have clauses that state they will not fall below zero.

Fixed-rate mortgages

For those on fixed-rate mortgages, there will be no benefit – at least on their existing deals – if interest rates fall.

David Hannah, principal consultant at Cornerstone Tax, says you may want to calculate whether the benefits of switching to a new, lower rate are worth it when set against any early-repayment charge.

"If you have a fixed-rate mortgage for three or five years, for example, there may be an incentive to refinance onto a variable-rate deal or a new fixed-rate deal.

"The cost of an early-repayment penalty may be outweighed by the benefits of the new lower rate they can obtain." We have more on this in our Guide to remortgaging.

In a weird quirk – and proof that mortgage costs are not dictated only by the official base rate – Boon thinks a negative base rate could result in mortgage rates rising over the long term, as savers will be discouraged from saving and consider investing in property.

"If too many new borrowers enter the mortgage market, lenders may be forced to increase interest rates to cope with the excessive demand."

Find out more: Seven tips to help you get a mortgage

Credit card debt, personal loans and overdrafts?

Negative interest rates would have little impact on credit card debt, personal loans or overdrafts.

Borrowing costs for these will remain the same as the lenders' own interest rates and charges will continue as before.

Richard Disney, professor of economics at the University of Sussex Business School, said: "Negative interest rates won't help the likes of credit card debt – credit cards will continue to charge interest rates at quite high levels for overdue payments."

Find out more: Back in the black: how to manage your debts

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Savings

Negative interest rates would penalise savers. Any gains made through even paltry interest rates will likely disappear and banks, at least theoretically, might charge you to look after your cash.

It is unlikely rates will actually turn negative because, in reality, banks and building societies rely on savers to be able to raise money and fund their mortgage lending.

"There will always be competition so there will always be options," says Anna Bowes, co-founder of Savings Champion. "It will be up to savers to search for the best rate possible, quickly move to a fixed-rate savings account or consider other options like Premium Bonds."

Find out more: Best savings accounts in 2021

Current accounts?

Few banks charge for standard bank accounts, but experts say this could change if the UK drops into negative interest rates.

Europe's biggest bank, HSBC, indicated it could be the first to change. It announced on 27 October 2021 that it was considering charging for current accounts.

It is unlikely that charges will come in for basic accounts. These are the no-frills accounts for more vulnerable customers with poor credit scores. Rather, free banking could be over for those with standard bank accounts that offer overdraft facilities.

Find out more: Best current accounts

Can you lose money with negative interest rates?

If your bank or building society set a negative rate on a savings account, you would lose cash as you'd be paying it to hold your money.

However, experts believe that even if the Bank of England cut rates to below zero, banks and building societies would be unlikely to follow suit. They might reduce their rates, but probably not into negative territory.

Bear in mind that savers do lose money in real terms if their interest rate is lower than inflation.

Sarah Coles, personal finance analyst at the investment platform Hargreaves Lansdown*, says a fee could be introduced by building societies and banks to hold cash in current accounts if the base rate does turn negative.

"But UK consumers are hugely resistant to current account charges. Customers simply don't like the idea of paying a bank for holding their money – so they're likely to try to avoid them.

"However, if you have an account offering a reasonable level of interest on cash, you can expect this to go."

Which countries have negative interest rates?

Countries with negative interest rates include Switzerland (minus 0.75%) and Japan (-0.1%). The Swedish central bank rate also went negative in 2015. It dipped as low as minus 0.5% before swimming back up to zero in January 2020.

The European Central Bank was the first major bank to lower one of its key interest rates – the deposit facility rate, which it sets every six weeks – into negative territory in 2014.

In 2019 Danish lender Jyske bank launched the world's first negative interest rate mortgage. Homeowners were "charged" minus 0.5% a year over a 10-year fixed term. Borrowers make a monthly repayment as normal – but the outstanding sum is reduced by more than the borrower has paid.

Sounds amazing, doesn't it? It isn't free money, however, as the bank still profits from fees and charges. And shortly after, the bank also started charging wealthy individuals for deposits of more than 7.5m Danish kroner (almost £1m) instead of paying interest.

*All products, brands or properties mentioned in this article are selected by our writers and editors based on first-hand experience or customer feedback, and are of a standard that we believe our readers expect. This article contains links from which we can earn revenue. This revenue helps us to support the content of this website and to continue to invest in our award-winning journalism. For more, see How we make our money and Editorial promise .

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