Bank of England Could Charge Lenders To Hoard Their Money

Commercial banks could be motivated to lend more cash out to fuel the economy and the property market. How does negative interest work?

Fuelling growth in the economy is one of the primary concerns of the government during the pandemic, due to the losses experienced from lockdown and other imposed restrictions. As a result, the Bank of England is now considering following in the footsteps of several other countries such as Japan and Sweden, by offering a negative bank rate, effectively meaning that commercial banks would be charged for keeping their money there.

The Concept of Negative Interest

During the pandemic and previous recessions, banks have notoriously tightened their belts and been unable to lend to consumers as freely as during better times. This has a knock-on effect where individual earners and households are unable to pump as much of their hard-earned money into the economy, and crucially this can bring the property market to a grinding halt. To prevent this scenario from repeating, the Bank of England is exploring the concept of negative interest rates. Commercial banks are required to keep a certain amount of funds in the Bank of England for safety reasons. However, any funds deposited beyond this threshold would have a negative interest rate applied to them, meaning that commercial banks would be charged a fee for storing their money there. The aim of the negative interest strategy is ultimately to encourage banks to lend their money out generously, motivating consumers to spend within the economy.

Great News For First-Time Buyers

A Stock estate agency explains that first-time buyers have been hit hard this year, as the number of mortgage products available to them with 5% or even 10% deposits have simply vanished into thin air. The effect of the government’s stamp duty holiday has been to inflate property prices further, which has been excellent news for vendors, but terrible for first-timers who are seeing their dreams of becoming property owners move further away. The potential introduction of negative interest rates would be excellent news for first-time buyers, as banks would be encouraged to lend out again. This makes it more likely that those former LTV products would reappear and be snapped up by buyers with their deposits ready.

Existing Property Owners

For property owners with existing mortgages, you might be wondering how the proposed negative interest rates will affect your own loan. This largely depends on the type of mortgage product you hold. For example, if you’ve taken out a fixed rate mortgage so you can guarantee the cost of your monthly repayments, then unfortunately any change to the bank rate won’t change your outgoing payments. Of course, once your fixed term comes to an end, you may look to remortgage to a different product and could make considerable savings if a negative interest rate is applied at this time. Homeowners on tracker rate mortgages are most likely to take advantage of the situation and it’s possible that you’d see your monthly repayments fall substantially depending on the balance left on your mortgage. In countries such as Denmark, mortgage products exist with a negative interest rate deal of -0.5%. Instead of receiving a cheque for the amount of money owed to a borrower, instead the calculated debt is simply knocked off the outstanding mortgage balance each year. A £100,000 mortgage would have an additional £500 per year wiped off it on a -0.5% rate deal.

As yet, it’s unclear if this a path that the Bank of England will definitely take. However, Deputy Governor, Sam Woods has approached the heads of UK financial institutions and asked them to prepare for such a scenario.