If you are worried about the Bank of England’s recent mention of negative interest rates but are unsure what it would mean for you then read on.
Firstly, it would be prudent to point out that negative interest rates are speculation at this point, and while they have may been introduced in Europe and Japan, we are not quite at that point here in the UK. That being said, it’s important to know what it would mean for your personal circumstances should negative rates be introduced.
The way interest rates work is that you effectively lend the bank your money in the form of savings, and they pay you back the amount you deposited with interest on top. Whilst interest rates are woefully low at the moment, it still means you can expect to get back more than you put in.
However, when banks introduce negative interest rates, such as we have seen with the European Central Bank whose interest rate is currently -0.5%, you can expect to pay the bank interest on your savings. Where this really gets complicated is if you are a borrower. With negative interest rates you should effectively be paid interest on the money you have borrowed and therefore end up paying back less than the original amount.
The theory behind negative interest rates is that they encourage people to spend rather than save, and therefore provide a much needed boost to the economy, although in practice there is little evidence that this is the case.
Where negative interest rates can benefit a lot of people is if you currently have a mortgage. Whilst we wouldn’t expect you to start earning money on the mortgage amount owed, negative interest rates could see a lot of mortgage providers introducing interest rates of 0%, effectively negating the cost of borrowing.
So how negative interests rates affect you personally will depend on whether you are a saver or a borrower.
It would be prudent to seek the professional advice of an Independent Financial Advisor if you are in any doubt or have concerns.
Peter Field is a financial analyst and has written for InvestingReviews.co.uk covering topics from pensions, savings, investments and ISAs. His knowledge of the Investment market has proven invaluable, making his unbiased views and opinions open and honest for everyone. In 2021 Peter retired and is working towards enjoying more of the outdoors with his beloved labrador Millie.