How do negative interest rates affect me?

Article written in September 2020

In recent times you may have heard commentators discussing the possibility of negative interest rates. On the surface that seems simple but what does that actually mean and how does it affect the average person.

It’s important to note, at this point that the conversation in New Zealand has largely been about a negative official cash rate i.e. the wholesale rate banks pay with the reserve bank and not the retail rates offered to customers.

What is a negative interest rate?

Traditionally, with a positive interest rate you get paid to save but in a negative interest rate environment it would be the opposite. In essence, there would be a fee charged to save money.

A negative official cash rate would mean that retail banks would be charged for holding their money with the Reserve Bank overnight, rather than lending it out. The impact, hopefully, would be to incentivise the bank to lend more.

Will I be charged for my savings account?

Aside from the fact that we’re already paying fees for bank accounts, a negative cash rate is unlikely to mean a penalty for having money in a bank savings account.

Will I get paid to have a loan?

Once again this is not a likely scenario. Traditionally, borrowers are charged at a higher rate than savers are paid (2.1 per cent margin on average across all banks in the last quarter of 2019). Unless banks are willing to charge savers then they couldn’t possibly pay borrowers.

What about mortgage rates?

Economist Gareth Kiernan, of Infometrics, stated that if the official cash rate dropped to -0.5 per cent then floating rates could drop to 3.75 per cent and fixed rates could fall below 2 percent (1 year fixed is currently at 2.55 per cent). It appears that mortgage rates are going to be very low for a long time.

Will it be easier to get a loan?

No one knows for sure. Banks in NZ are not set up or prepared for a negative interest rate environment so it may take them a while for them to get a grips with it.

If you are interested in more information about mortgage rates or getting a mortgage then contact our mortgage advice team.


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