What Actually Happens If Interest Rates Turn Negative?

[bednobs]

I have a tracker mortgage that tracks at 0.25% above base rate. If rates actually turned negative by more than 0.25% what would that mean practically for my repayments?

[ichkeria]

This is the obvious question I wanted answered on the radio this morning but they didn’t!
In theory it means the bank pays you to borrow. That would probably mean a reduction in your repayment?
Same as a normal interest rate reduction.
However the main point of it is to inventivise lending

[THECORBYLOON]

From a May article in The Guardian.

"What happens to my mortgage?

If it’s a fixed-rate mortgage, nothing. And most households are on this type of deal – in recent years around 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. David Hollingworth, of the mortgage brokers London & Country, says trackers sold very recently have in some cases had a “collar” that prevents the lender from having to cut the rate at all. Skipton building society, for example, has a tracker at 1.29 percentage points above the base rate that can only go up.

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% – so if your mortgage is at base rate plus 1 percentage points, 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."

As it says at the end, you'll need to check the terms and conditions to see shat what would happen to yours.

[ichkeria]

I suspect nothing would happen.
In theory banks would you pay to to take out a mortgage but I don’t think it works like that.
Paying people to lend them money isn’t a very sensible way to encourage lending.
It’s aimed at discouraging big savers who could lend their money instead

[ToraToraTora]

if the rate goes negative you pay them to save and they pay you to borrow. In reality the base rate may turn negative but lending rates probably wont savings rates probably will go negative. So if rates go to -1% and your mortgage rate is 2% above base you'd pay 1%. negative rates are a common thing in the far east, Japan etc, where they are used to encourage people to spend rather than save. If savings rates are -1% then it will cost you £1 per year per £100 to save. Essentially it's pointless saving.

[ichkeria]

I didn’t realise Sweden and indeed much of Europe already has negative rates

[THECORBYLOON]

"if the rate goes negative you pay them to save and they pay you to borrow."

Not necessarily, as stated in my earlier answer.

[ToraToraTora]

can you turn off the contrarian gene for a nano second TCL. I'm talking arithmetically. No doubt there will terms and conditions that prevent lending rates to actually be negative but if they did end up negative then lenders would be paying the borrowers as I described.

[THECORBYLOON]

TTT, I was correcting your assertion that "if the rate goes negative you pay them to save and they pay you to borrow."

You've just conceded that, "No doubt there will terms and conditions that prevent lending rates to actually be negative"

Perhaps you need to check your understanding of "contrarian"?

[ToraToraTora]

cobras, you knew what I meant but found a way to criticise. That is the very definition of the word and you are the master.