Everything you (and your wallet) need to know about negative interest rates

There’s been a lot of chatter about the Reserve Bank of Australia (RBA) potentially cutting the cash rate soon, but with only 25 basis points separating it from zero per cent, could we see negative cash rates in Australia?

Homeowners and deposit-holders affected by variable interest rates might be wondering what a negative cash rate environment would even look like, and if it’s even possible. Here is everything you need to know about what may happen if the Reserve Bank of Australia were to cut the cash rate below zero per cent.

How do interest rates fluctuate?

Variable interest rates, such as your variable home loan rate, savings account rate and term deposit rate, are set by your provider and influenced by the RBA’s cash rate. The RBA meets on the first Tuesday of each month (except for January) to set this rate. They will make the decision to raise, lower or hold the cash rate as early as next Tuesday.

• Put simply, if the RBA were to cut rates into negatives this may be good news for mortgage holders, and bad news for savers.

Home loan lenders are encouraged to follow the cash rate movements to pass savings on to their borrowers, in an effort to lower their home loan repayments and often encourage more spending in the economy. Also, one of the key benefits of a negative cash rate is, in theory, that businesses will be encouraged to borrow more money and invest it back into the economy.

Meanwhile, those with savings accounts may see their already miniscule interest rates fall further, and term-deposit-holders coming to the end of fixed periods will be entering an environment of record-low returns. Providers may even be put in the position of charging deposit-holders to keep their money with them.

While negative cash rates could mean more investment in the economy, it may also mean everyday Aussies feel called to start hiding their money under their mattresses.

What are the chances of the cash rate going into negatives?

The RBA has indicated it does not want rates to fall into negative territory, but there is still a chance this may happen, as it has in many other countries across the globe.

Central banks in countries like Japan, Switzerland, Sweden, Denmark and the European Central Bank have all cut rates into the negatives before. These drastic measures were taken in an effort to bolster struggling economies.

However, central banks, like the RBA, are not quick to push the negative cash rate button. Negative cash rates will significantly impact our banks’ profitability, and everyday Aussies, faced with the potential of having to pay to keep money in savings accounts, may withdraw funds en masse.

Regardless, RBA deputy governor, Guy Debelle, has stated that further cuts to the cash rate may be a possibility.

“Given the outlook for inflation and employment is not consistent with the Bank's objectives over the period ahead, the Board continues to assess other policy options,” Mr Debelle said.

Westpac’s chief economist, Bill Evans, previously predicted a rate cut next Tuesday, however, has since backtracked just today. Westpac now states that we may see a cut in early November.

While they may not immediately cut it to zero, we could be seeing the cash rate fall as low as 0.15 per cent or 0.10 per cent. And with only three board meetings left this calendar year, we could be seeing rate changes sooner rather than later.

Negative interest rates and your home loan

If you have a fixed rate home loan and the cash rate plunged below zero, very little will happen to you until this fixed period is over. However, for borrowers on variable mortgages, your repayments may change dramatically.

Ideally, your lender will pass on the full rate cut, meaning your mortgage interest rate will fall as much as the RBA cut the cash rate. If your home loan was on a rate of, say, 3.20 per cent, a cut of 15 basis points would bring it down to 3.05 per cent.

While this may seem small, on a $500,000 loan with 25-years remaining, this would be a savings of $49 a month, and $588 in the first year (excluding fees). In a time when every dollar counts, a rate cut can mean good news for borrowers.

But could your interest rate also fall into negatives – meaning your lender pays you to have a mortgage?

Something similar happened in Denmark, in which Jyske Bank launched the world’s first negative interest rate mortgage. The Danish bank offered a rate of -0.5 per cent, however borrowers weren’t being paid to have a mortgage. In fact, when you factored in fees and costs, borrowers were still paying additional charges on the loan’s principal.

It’s unlikely rates will fall so low that this occurs in Australia. But if rates do cut, and your bank doesn’t pass it on in full, it may be worth comparing which other low rate options are out there.

Negative interest rates and your savings

The most unknown change for your finances may come to the humble savings account and term deposit.

With the cash rate currently at 0.25 per cent, interest rates on savers are at rock-bottom, with the rates of many accounts already sitting under 1 per cent. It’s no secret that even the most diligent saver will get very little return on their nest egg with rates like this. But could savings accounts fall into negative interest rates?

Without a crystal ball, it’s difficult to say. While your provider may not move to charge you interest for the privilege of having a bank account, savings account or term deposit, you may find yourself paying an ongoing fee that does just this.

When interest rates fall to such severe lows, and if the RBA were to cut the cash rate into the negatives, we may see a spike in worried deposit-holders withdrawing their cash and keeping it in under the mattress or in locked safes to avoid any costs.

Unfortunately, not only are your rainy-day funds far less secure at home than in a bank, it is much less convenient to access them once you cannot use your debit card or digital wallet. With COVID-19 restrictions prohibiting the use of cash, you may find yourself unable to pay for goods and services.

For now, it may be worth keeping an eye on the cash rate and considering regular financial health checks. If you are not getting the best possible financial products for your budget and financial situation, consider if switching to more competitive options may suit you better.

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