Business

Fancy a 20-year mortgage at 0 per cent?

.
Peter McGahan

OVER the last few weeks we have had a number of questions on negative interest rates and what that actual means to the man on the street. Last year, we covered both negative interest rates and a cashless society (they go hand in hand in many respects) and such a thought seemed strange if not far-fetched to most.

Since then, much has changed. Tap and go payments have followed the current health crisis whilst many central banks have indeed moved toward, or indeed are, in negative interest rates (the UK rate is 0.1 per cent).

You should understand that a cashless society is really quite essential for a negative interest rate policy to work fully, and that a negative interest rate policy is simply the final last ditch attempt to artificially resuscitate a breathless economy where quantitative easing (QE) and record low level interest rates, simply haven’t worked.

We can easily put forward the argument that capitalism has not worked where it needs such ‘mouth to mouth’, particularly in ‘Covid times’!

A lasting global neo-liberalist policy that has supported non-tax paying corporations and individuals, instead of circulating cash around and around the same town, has starved society.

In 2017, some 6.5 million adults had no cash savings, and a further 32 per cent of the population had less than £2,000 as savings.

Over the last 12 years, central banks have artificially, but successfully resuscitated equity markets with QE (ie. pumping money into the economy by typing into their computer that they have it, buying assets from pension funds etc., which they then use as new cash to re-inflate the economy).

Further to that, they all but eradicated interest rate charges, so much so that many borrowers today would view an interest rate charge of 6 per cent on a mortgage as Armageddon, whilst us older folk would have seen it as a bonus in years gone by.

A policy such as this allows no interest rate floor and is only successful without cash as that floor. Rates can then be introduced to minus four/five percent to counter severe recessions.

This would seem and obvious target/aim of central banks i.e. the ability to do that.

Whether or not they will do is another thing, but the new Governor of the Bank of England has already stated that he may do so.

The financial system, however, is not prepared for that yet so do not expect that immediately.

Going cashless? You will no doubt be aware of the global move to block cash from being used for large payments, and also the very obvious new digital world of global payments.

I would not be without my Revolut card anywhere in the world. Its security and convenience, let alone cheap access to rates makes it an impossible service to ignore.

This is at a time when France has banned cash transactions above €1,000, Spain above €2,500, Italy €3,000 and moves are afoot in the USA/Australia to do the same. Do you see the theme?

‘Covid times’ is a great excuse to accelerate this further. Note all previous excuse hooks to hang disaster caps onto e.g. ‘credit crunch’.

Will this lower bank rates and should you fix your mortgage now?

Yes it does. In August 2019, Jyske Bank in Denmark introduced a 1o-year fixed rate mortgage at minus-0.5 per cent. Read that again. Any takers?

Nordea Bank, not to be outdone, came in with a 20-year fixed rate mortgage at 0 per cent and 30 year rate at 0.5 per cent.

Much depends on the UK economy’s response to the current scenario but the handling of Covid-19 and Brexit (still to come) has been as glamorous as something that is not very glamorous. Versus many global economies, the UK domestic stock market has tanked.

It would be therefore be prudent for the Bank of England to prepare and allow for the above policy to be available.

Savers have the unfortunate ‘bonus’ of having to pay to have their capital to be ‘held in custody’. Rich customers in Switzerland, for example, have to pay 0.75 per cent of their cash held as a fee and an instant access account in Bavaria is offering a savings rate of minus 0.5 per cent.

Will it happen? More next week.

Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For advice on the best mortgage rates or any financial query, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net.

 

Enjoy reading the Irish News?

Subscribe now to get full access

Business