Features

Negative interest rates: will you have to pay to save?

Businesses have been warned that they may be charged negative interest rates on their deposits. Should savers be worried, asks Natalie Stanton.

805-small-note-1200
Negative rates would shrink your savings

Last week, NatWest became the first UK bank to warn business customers that it may charge them negative interest rates on money held in current accounts. "Global interest rates remain at very low levels and in some markets are currently negative," the bank wrote. "Dependent on future market conditions, this could result in us charging interest on credit balances."

So far, this is just a warning there's no immediate sign that the Bank of England intends to copy other central banks in Europe and elsewhere by cutting rates below zero. And NatWest's comments apply to business accounts only, not to individuals. But it's possible that at some point in the future we might find ourselves in the topsy-turvy world of negative rates. So what might the results be if that happens?

Brace yourself for fees

Alternative Bank Schweiz a tiny Swiss commercial lender with a bent for projects with a social benefit has become the first to begin charging savers for taking their money. Customers currently face a -0.125% rate on their cash, and a -0.75% rate on deposits above 100,000 Swiss francs. But this seems unlikely to catch on more widely, for fears of triggering cash-hoarding.

It's more likely that banks would charge fees on current accounts to cover their costs. Some banks in the UK already do this. For example, Santander charges £5 per month for all customers of its 123 current account, while a number of other banks charge a fee for certain accounts if you don't pay in a minimum amount each month or meet other conditions. However, current-account fees are more common in other countries and many banks would like to introduce them here. The introduction of negative interest rates could be a pretext for doing so.

Getting paid to borrow

Unfortunately, this is unlikely to end with home owners being paid to hold a mortgage by lenders. The interest rate on trackers is set at a significant margin above the base rate, and many contain a clause stating that repayments won't fall below the 0% mark. For example, back in 2007 Cheltenham & Gloucester offered a two-year tracker rate mortgage at bank rate of minus 1.01%.

When interest rates were cut to 0.5% in March 2009, those borrowers would have had a theoretical rate of -0.51% if their tracker rate had followed. But in practice, the bank charged its customers a rate of either 0% or a nominal 0.01%.

That said, there have been cases in Europe where mortgage contracts were written in such a way that banks had to pay their customers. Danish banks are understood to be paying thousands of borrowers interest on their home loans. They have increased some fees to compensate but never mounted serious legal obligations. The benchmark interest rate in Portugal and Spain has not yet turned negative, but banks there are battling proposals that could require them to pay borrowers if it did.

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
What to buy as the pandemic’s pent-up demand is finally released
UK Economy

What to buy as the pandemic’s pent-up demand is finally released

As economies reopen, says Merryn Somerset Webb, people are going to start spending again. And when they do, here’s what you want to be holding.
23 Nov 2020
For the best savings rates you can find now, forget the high street banks
Savings

For the best savings rates you can find now, forget the high street banks

If you're looking for any sort of return from a savings account, forget the high-street, says Ruth Jackson-Kirby. Here's where you'll get the best rat…
20 Nov 2020
How you will play your part in refinancing the post-Covid economy
UK Economy

How you will play your part in refinancing the post-Covid economy

All this stimulus has to be paid for – whether through inflation, tax rises, or financial repression. It's going to be an uncomfortable experience, sa…
19 Nov 2020

Most Popular

Jim Mellon: the world is on the brink of three major revolutions
Share tips

Jim Mellon: the world is on the brink of three major revolutions

Jim Mellon has been giving MoneyWeek’s readers lucrative ideas ever since our very first issue. He tells Merryn Somerset Webb how he sees the next 20 …
5 Nov 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
6 Nov 2020
November 2020 update: how the MoneyWeek investment trust portfolio has fared
Investment trust model portfolio

November 2020 update: how the MoneyWeek investment trust portfolio has fared

How have our favourite investment trusts been doing? And what would we change?
6 Nov 2020