What would negative interest rates mean for savers?   (2024)

Banking giant RBS/NatWest has warned customers they face paying to keep their money in an account if the Bank of England cuts interest rates to below zero.

Yesterday, the bank also confirmed that the move, which initially only affected 1.3million business customers, could also hit ordinary savers.

It has prompted fears others may follow suit. Co-op Bank has said it will not rule out cutting rates for its four million personal account customers if interest rates plunge into negative territory.

A spokesman says: ‘We have not made any decisions on how we would react to any change in the base rate.’

This is uncharted territory and has thrown savers and borrowers into confusion. Here, we answer vital questions:

What has happened?

Royal Bank of Scotland has written to 1.3 million business account-holders to say it has introduced new terms and conditions allowing it to charge customers negative interest rates for depositing cash.

Yesterday, RBS, which also runs NatWest, said it had no plans to hit customers while the official Bank of England interest rate is still positive.

But it said it would ‘consider any necessary action’ if the base rate plunges into the red, and would not rule out hitting ordinary savers with negative interest rates in these circ*mstances.

Why has RBS done this?

It expects the Bank of England may have to cut base rate. Experts think official rates are likely to fall from 0.5 per cent to 0.25 per cent next month as the central bank tries to stave off an economic downturn.

In theory, lower rates help stimulate the economy by encouraging people to borrow and spend more.

If slashing rates fails to boost the economy, there’s a possibility the Bank of England might take the axe to rates again — even taking them into negative territory.

This is the case in Europe, where the European Central Bank has a rate of minus 0.4 per cent and the Swiss National Bank has a rate of minus 0.75 per cent.

If we follow them, High Street banks and building societies may have to pay to deposit money at the Bank of England. By inserting the new clause into its terms, RBS reserves the right to do the same to its customers.

What does it mean for RBS/ NatWest business customers?

As long as interest rates stay at zero or above, nothing should change. And even if rates do fall below zero, customers will not necessarily face new charges.

If a charge is introduced it is likely to be relatively small — certainly at first. For instance, a minus 0.1 per cent charge would mean that an account-holder with £10,000 would see the cash shrink to £9,990 after a year.

What about current account customers and savers?

Not at the moment. The clause was only inserted into the terms of business account holders.

But the bank told Money Mail it has not ruled out introducing a similar clause to all accounts in future. That would mean that if interest rates went into the red, ordinary customers could face charges for cash held on deposit in current accounts.

It’s unlikely this would ever affect ordinary savings accounts or Isas.

How about other banks?

Money Mail asked all the major banks if they had similar plans. Barclays, First Direct and TSB would not comment.

First Direct’s sister bank HSBC says it had no plans to apply negative rates to business or personal accounts where the money was held in British pounds.

But it said that in February it reserved the right to apply negative rates to foreign currency business accounts if rates on that currency drops into negative territory. This might affect a company that has an arm overseas.

Lloyds and Halifax say they have no plans to charge customers if rates turn negative. Nationwide Building Society says it has no plans to cut rates below zero for personal customers and does not offer business accounts. Post Office Bank and Santander say the same.

However, an insider at one major bank admitted that if competitors slashed rates, it would be forced to follow suit.

There is no indication rates will turn negative there at this stage.

What happens to my home loan if rates are negative?

Customers with fixed rates will see no change to their monthly mortgage repayments. But those with trackers, which follow Bank of England rates up and down, are likely to see their mortgages get cheaper.

For example, if you have a loan two percentage points above the Bank of England base rate, you will be paying 2.5 per cent. If base rate is cut to 0.25 per cent, your rate will be 2.25 per cent.

Sadly, there is almost no chance that mortgage rates will go negative for customers. Banks always charge more than official rates on their fixed deals.

What about pensions and investments?

If rates go into the red, it could give a boost to savers with money squirrelled away in investments and pensions.

This is because if lower rates stimulate the economy, it feeds through to higher share prices.

If the profits of the companies that pension funds invest in go up, they should in turn reap bigger returns for their customers.

However, for those who are about to retire, negative interest rates are likely to be a blow. Savers who want to turn their pension pot into an income for life or annuity are already being offered paltry deals. But these payouts are likely to become even more pitiful.

This is because annuities are linked to returns on government bonds known as gilts, which are snapped up by investors during turbulent times. Negative interest rates is likely to cause these returns to plunge, pummelling payouts.

Will this happen?

Experts say a cut to zero or below is unlikely in the near term.

In truth, it’s improbable any bank would charge ordinary savers for holding their cash.

In Japan, which has had negative interest rates for months, banks have been reluctant to charge customers directly.