Mortgage Monitor: What would negative interest rates mean for mortgage borrowing?
When in an attempt to protect the economy amid the Coronavirus pandemic the Bank of England (BOE) made its second successive interest rate cut in a matter of days, it moved into uncharted territory.
A cut to 0.1%, where the rate stands today, is the lowest the rate has been in the Bank's 325 year history, and represents officials' best efforts to get us all spending and borrowing our way out of the crisis.
The Bank's Monetary Policy Committee meets to decide whether to cut, hold or raise the base rate. The minutes of the next meeting are due to be published tomorrow, Thursday 18th June.
Though it's unlikely to herald another cut, financial markets are viewing more cuts - and even a move negative - as increasingly likely, something investors would have considered unthinkable just a few years ago.
Andrew Bailey, the governor of the Bank of England, told MPs he would not rule out negative interest rates "as a matter of principle." Morgan Stanley, the American investment bank, sees the base rate reaching zero in November with the central bank potentially cutting further in 2021.
Does that mean I won't have to pay interest on my mortgage?
Unfortunately not. Many banks have a floor below which they won't drop rates, regardless of the base rate moving negative. The mechanism for preventing this varies from lender to lender, so check your contract.
It's possible that, if you're on a tracker mortgage, your rate dips slightly, but even that is unlikely with the rate already at 0.1%. The overwhelming majority of homeowners are on fixed rate products, and those borrowers won't see any movement in interest payments.
Should I wait for further cuts, even to zero, before I revisit my finances?
Borrowing costs are currently at or close to as low as they've ever been, and because the rate is already so low they're unlikely to drop further - though small dips are possible. On the other hand, the banks are currently offering excellent retention products, and it's worth taking advantage of those while you can. Give us a call to assess your options.
If borrowing costs aren't likely to get much cheaper as a result of negative interest rates, what would change?
Banks have huge surpluses in funds borrowed from the BOE's central reserve that they hold and lend out in tranches - essentially portions of money at different rates. If all of a sudden rates turn negative, the banks' costs of holding that money relative to lending it out climbs, so they'll want to increase their lending to keep costs down.
This will increase liquidity in the housing market as a whole, and could increase the number of transactions carried out across the country.
If you would like to assess your options, please contact us.