Negative interest rates - what it means for savings and loans?
The Bank of England is seriously looking at heading into negative territory for the first time ever. What does it mean for you?
Negative interest rates were considered by the central bank during a meeting in September. The Bank of England has now told high street lenders to provide details on how they would cope if interest rates were cut to zero or even turned negative by November 12.
The idea behind negative interest rates is to encourage banks to increase lending and so get the public spending money to boost the economy. Getting more cash out of savings accounts and into the hands of shops, tradesmen and other workers could also help boost their earnings and stop firms going bust or laying people off.
Equally, incentivising banks to lend money by making loans cheaper can mean everything from more people moving home, more holidays and more cars sold.
But even were rates to drop below zero, it's unlikely families and household savers will have to pay to have their money in a savings account or handed extra cash when borrowing.
The first point to make is that a lot of loans, mortgages and savings products are fixed-term deals. That means the rates won't change until the term ends, no matter what the Bank of England does. In fact, even variable-rate mortgages frequently have clauses saying interest payments will never fall below zero.
Other loans - such as credit cards and overdrafts - have interest rates charged based on the cost of administering them. That means they are unlikely to get a lot cheaper - even if interest rates fall into negative territory.
What it almost certainly would mean is that savings rates would drop to effectively zero.
Source: James Andrews of Money Editor