Britain’s banks are not ready for negative interest rates, according to the chairman of NatWest.
“We’re not completely ready for it,” Howard Davies said. “There would be technical issues and many contractual issues.”
The Bank of England said last week it had written to all banks and building societies to check whether they could pass on negative interest rates if the central bank cut the cost of borrowing below the current base rate of 0.1%.
Q&AWhat would negative interest rates mean for UK consumers?
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In February 2021 the Bank of England told high street banks and building societies they have six months to prepare for negative interest rates. BoE policymakers stressed that the request did not mean a cut in borrowing costs below zero was imminent or even likely, but with few tools left to boost the economy in the event of a downturn, the central bank needs negative rates to be available as an option.
What would happen to my mortgage?
If it’s a fixed-rate mortgage, a cut in interest rates would mean no change. Most households are on this type of deal – in recent years about nine in 10 new mortgages have been taken on a fixed rate.
If it is a variable-rate mortgage – a tracker, or a mortgage on or linked to a lender’s standard variable rate – the rate could fall a little if the base rate is cut. But the drop is likely to be limited by terms and conditions.
Older mortgages often have a minimum rate specified in the small print. Nationwide building society, for example, will never reduce the rate it tracks below 0% on mortgages arranged since 2009 – so if your mortgage is at base rate plus 1 percentage point, it will never fall below 1%. Santander specifies in some mortgages that the lowest rate it will ever charge is 0.0001%.
You will need to dig out your paperwork to see how low your mortgage rate could go.
Will new mortgages be free?
In Denmark, borrowers have been offered mortgages with negative interest rates. Mortgage customers with Jyske Bank were lent money at a rate of -0.5%, which meant the sum they owed fell each month by more than the sum they had repaid. There is no reason why UK lenders could not follow suit.
What happens to my savings?
UK savings rates have already been affected by the two base rate cuts in March 2020 and many easy-access accounts from high street banks pay just 0.01% in interest.
Some banks already charge for current accounts, but it is unlikely that you will soon be forced to pay to keep small sums on deposit – despite the low base rate it is possible to earn 1% or more on a fixed-term savings account.
Wealthy savers are likely to be the first who would face a charge. In 2019, UBS started charging its ultra-rich clients a fee for cash savings of more than €500,000 (£449,000), starting at 0.6% a year and rising to 0.75% on larger deposits. And at Jyske Bank, similar charges apply.
What about my pension savings?
Negative interest rates are bad news for pension funds. If you have a defined contribution scheme you may find the predicted value on retirement falls, and you need to put more in if you have a target finishing date in mind. It is also a bad time to buy an annuity to provide a retirement income, as the returns on these fall when rates are negative.
Since the summer, members of the Bank’s rate-setting monetary policy committee have investigated how negative rates would affect banks’ profits and whether they would be passed on to customers.
The Bank of England governor, Andrew Bailey, speaking during an evidence session in the House of Lords last week, said he did not know whether high street bank computer systems could cope with minus figures.
Davies said on Thursday he was against the introduction of sub-zero rates, arguing there was little evidence it had encouraged investment in other countries.
“We are really assuming interest rates are pretty well zero for any reasonable planning horizon. It could be worse than that.”
Speaking to Bloomberg, Davies also warned that the finance industry would emerge diminished from the ongoing Brexit talks.
He said British banks were prepared for a no-deal Brexit, but whichever outcome was likely to be a “suboptimal solution”, and that some business would “drift away” from London from next year.