What are negative interest rates and how will it effect you.

Generally we all know, when you have a savings account, banks use that money to lend, charging a higher rate than what they pay savers. It is how bank balance their books. Generally our economy grows 'inflation'. But it is possible to have deflation. Japan experienced this 1991-2001.

The Bank of England has asked all bank "are their systems capable of processing negative interest rate.

Technically, with negative interest rates:

• Instead of receiving interest on your savings you would pay a fee for holding your money, similar to having a safety deposit box.
• Instead of paying interest on your mortgage, the mortgage company will pay you to hold their money.

In reality we are unlikely to see that situation, because of possible unforeseen implications:

• Savers will be concerned about fees and may withdrawal all their money in favour for under the mattress to save on fees. This will cause a run on bank cash. You can imagine the problems.
• Borrowers may be enticed to borrow more than they can afford to earn a fee.
• Therefore, in reality saving & mortgage rates are not likely to fall below 0%. (A floor level).
• Interest rate ceiling are the top wack in which it wont rise above, floor is the opposite in which rates will not fall below.
• If banks do introduce a fee for savers, it cannot be too much otherwise there will be a run on cash and people may look for havens or cheaper alternatives to put their money.
• Starling bank has a fee for savers >£50,000.

Winners & Losers:

• Obvious, losers are all savers.
• Fixed rate mortgages.
• A winner will be the base rate tracker mortgage. If your mortgage is currently base+1%, you will be paying at present 1.25%. If the Bank of England drops its rate to -1%, your rate will be 0%.

Cash Havens - other possible alternatives:

• Premium bonds, but NS&I (the market leader) have slashed their payout winnings rate, but you never know, you might win a £1m.
• Safety deposit box, might be cheaper, but its a lot of hassle; safety deposit box access in the UK is not like you see in the movies.
• As well as a rental, there will be a fee every time you access it.
• Your money is harder to access and if we are in local lock-down, you may not be able to get at it.
• Gold, but there are the usual risks, security, fees & the price can fall, so you can actually lose money.

Should you pull your money out:

• If you do, you will lose the £85,000 protection scheme. As we all know, if any bank cease to trade, your money is government guaranteed up to £85k in each bank (banking licence).
• Banking licence definition; Halifax and Bank of Scotland merged many years ago to become HBOS, so they now have one banking licence,
• The banks do have individual branches, if you had £85k in both (£170k),  you are only covered on lot of £85000 not both.
• Most people want regular access and to be able to see their balance online at will.
• If you keep it at home or elsewhere, you need to consider: theft, fire, security when transporting, informing your insurance company if you want cover, but will they cover you!!!
• I WOULDN'T RECOMMEND WITHDRAWING YOUR MONEY. It is worth paying the fee for protection and regular access.