What would negative interest rates mean for your mortgage?

What would negative interest rates mean for your mortgage?
The Bank of England is reviewing whether to cut interest rates to less than zero to help stimulate an economic recovery, but has said it won’t act until it has fully assessed the impact of doing so.

Interest rates have never been negative in the Bank’s 324-year history, but the pandemic and lockdown have severely damaged economic growth both in the UK and globally. Reducing rates to below zero may help encourage businesses to spend money rather than leave it deposited with banks where they would face charges for keeping it there.

Here, we explain what negative interest rates could mean for your mortgage.

Negative rates and your mortgage

If interest rates do fall below zero, the impact this may have on your mortgage will depend on what type of deal you have.

• Fixed rate mortgages

If you have a fixed rate mortgage, your rate will stay the same until your deal ends, regardless of what happens to interest rates. This means that even if interest rates do fall below zero, you won’t see any change to your monthly payments.

However, fixed rate mortgages are already extremely competitive, with plenty of rock-bottom deals to choose from. Some mainstream lenders, including HSBC and Barclays, have reduced their fixed rates in recent weeks, and have reintroduced fixed rate deals for those with smaller deposits.

According to recent data from financial website Moneyfacts, since May 15, the average rate on a 90% loan-to-value (LTV) two year fixed rate deal has fallen from 2.41% to 2.34%, whilst the average rate on a five-year fixed deal at 90% LTV has fallen from 2.67% to 2.57%

• Tracker or variable mortgages

If you have a tracker mortgage, your rate will usually track the Bank of England base rate plus a set percentage. If Base Rate did drop again then it could mean a corresponding drop in the mortgage rate but it will be important to check the terms of the deal. Tracker mortgages often have a minimum rate, or ‘collar’, below which the rate cannot fall.

The minimum rate will depend on the specific terms of the deal and could be collared some way above zero to limit a drop. Others may give scope to fall as low as zero but borrowers are unlikely to see their mortgage rate fall below zero.

Your rate may drop a little if interest rates fall below zero but given rates are already so low, any further reductions could be limited.

If you’re considering remortgaging to a tracker deal, bear in mind that recent weeks have seen some lenders reprice their tracker rates with higher margins above Base Rate . There may be the chance to benefit from any further cuts but it’s important to consider how payments could change if rates start to rise again in future.

If you have any other type of variable rate mortgage, or are on your lender’s standard variable rate, again you may see your rate fall slightly if interest rates go below zero, but as these rates are not directly pegged to the Base Rate there is no guarantee that they will fall at all.
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