Could negative interest rates save you money on your mortgage?

Interest rates in the UK have been low for a while, with the Bank of England (BoE) cutting the base rate to 0.1% last March in a pre-emptive response to the coronavirus pandemic.

However, the central bank has now indicated that it may go one step further, writing to financial institutions and asking how prepared they would be if negative interest rates came into effect in the next six months. This would mean taking the base rate to below zero for the first time in the bank’s 326-year history.

As the BoE’s base rate has an impact on how commercial banks and building societies set their interest rates, it could also have an impact on your mortgage.

The BoE uses the base rate to control economic growth

The BoE’s base rate is the tool it uses to control the rate of inflation, keeping the UK on track to achieve the bank’s target growth of 2% per year.

Financial institutions such as banks and building societies can hold their cash with the BoE, receiving interest at the base rate on their money.

When the base rate is high, this encourages financial institutions to not spend or lend their money but save it with the BoE instead. This helps reduce spending, slowing the rate of inflation if it is too high.

When the base rate is low, there’s less incentive for banks and building societies to hold their money with the central bank. This encourages them to lend it, helping to stimulate the economy in periods when the economy needs spending to propel it.

Negative interest rates would see the BoE charge financial institutions for holding their money with it, rather than paying them interest. Arguably, this is the harshest measure the bank can take as it all but forces banks to spend and lend.

Your mortgage payments could drop, depending on your mortgage deal

If you have a fixed-rate mortgage, a drop in the base rate is unlikely to affect you. But, if you’re on a variable- or tracker-rate deal, it may save you some money.

Lenders typically use the base rate to determine the interest rate on variable-rate mortgages, and tracker-rate mortgages follow it by design. Therefore, it’s feasible that your mortgage interest rate could go below zero, meaning your lender would take more money off the total you owe each month than just the amount you pay back.

However, while you may see a dip in your interest rate, MoneySavingExpert’s Martin Lewis finds it unlikely that mortgage rates will fall below zero.

“I wouldn’t expect to see you paid a negative interest rate,” he said. “It’s more likely that we’d drop to somewhere around 0% on those tracker rates for some people.”

A 0% interest rate would mean your lender stops adding interest to the total of your mortgage each month. This could reduce your repayments, especially if the base rate is negative for an extended period.

However, it’s worth noting that some mortgage deals have a lower “collar” that they won’t fall below. This means, even if your interest rate does fall, there’s a limit for how far it can go. Check with your lender to see if your deal has such a collar.

Get in touch

If you’d like to find out more about how negative interest rates could impact your mortgage deal, please get in touch. Email enquiry@edinburghmortgageadvice.co.uk or call 0131 339 2281.

Please note:

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

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