Banks make millions of pounds in profit from the margin between the amount they charge borrowers and pay savers interest.
The Bank of England makes an average of £75million each year from ‘activities other than printing banknotes’, according to its website.
But if the Bank of England’s base interest rate turns from a positive percentage to a negative, this could result in a saver being charged to keep their money in their bank account – while the borrower pays less for a loan.
The aim is to encourage banks to give out money in the form of loans so it is charged less for keeping money at the Bank of England.
At the moment a person who takes out a loan has to pay the bank money on top of the original loan. The saver, meanwhile, is paid by the bank to keep their money in its account.
The borrower pays interest while the saver is paid interest. The ‘interest rate’ is something Money Saving Expert Martin Lewis has described as ‘the cost of money’ on his podcast.
As banks are asked to provide details on how they would adapt to negative interest rates, what could the changes mean for your money?
What will happen to my mortgage?
If the mortgage is fixed-rate nothing will happen if interest rates head into the negative.
But if it is a variable-rate mortgage, a tracker or a mortgage linked to a lender’s standard variable rate, it could fall if the base rate is cut unless terms and conditions prevent it.
Others may have a minimum rate the interest can hit before it’s stopped. For example, Nationwide has a cap at zero per cent. For some of its mortgages Santander makes it clear the lowest rate it will ever charge is 0.0001 per cent.
I’m looking at taking out a mortgage – will it be free?
Mr Lewis said mortgage holders wouldn’t have any cost for borrowing money, which ‘would help some’.
Negative interest rates mean the sum a mortgage holder owes falls each month by more than however much has been repaid.
In Denmark last year borrowers with Jyske Bank were lent money at a rate of -0.5 per cent.
What about my savings?
Andrew Hagger, the founder of the financial information website Moneycomms, told The Guardian he doesn’t think banks will start charging people to hold savings in a bank account.
‘Many would just withdraw cash and possibly keep it in the house, thus opening a can of worms around security and break-ins,’ he said. ‘However, if the Bank of England did introduce negative rates, I’m sure we would see even more savings accounts heading towards zero.’