As the UK economy continues to feel the impact of the Coronavirus pandemic, the possibility of the Bank of England setting negative interest rates has taken a step closer to becoming reality. Although no one can be sure if the Bank of England will decide to set negative interest rates, consumers should start considering what impact it will have on their personal finances if base rate is cut. To help consumers prepare in the event that negative interest rates are introduced, below we’ve looked at how it will impact savings.
How will negative interest impact savings?
Negative interest rates will likely see the already low savings rates fall further still. There is even the possibility that banks will charge savers for depositing their money into a savings account, although realistically this is unlikely for the average saver but may be a possibility for those with high deposits, for example over £500,000. Savers with a fixed rate bond or ISA will not see the saving rate change for the term of the deal, but if they are coming off a fixed rate deal, they will likely struggle to find another deal offering as competitive a rate.
Variable rate savings accounts, such as easy access savings accounts, will likely see the biggest fall in rates if interest rates turn negative. Already, easy access savings accounts have been impacted by two base rate changes, which has seen average rates fall from 0.56% on the 1 March 2020 to 0.23% on 1 October 2020. If base rate is cut further, it is highly possible that easy access account rates will fall further still.
What alternatives are available to savers?
Savers who are prepared to take higher risks with their savings and who are looking for a long-term savings account, could consider structured deposits. These accounts guarantee that the initial deposit invested will be returned, but do not guarantee that any interest will be earned on the deposit. In return for this risk, structured deposits can result in investors earning higher returns on their initial investment than if deposited into a five or seven-year fixed rate bond. To find out more about structured deposits, read our guide What is a structured deposit product?.
Those looking to deposit their money long-term and who are prepared to risk losing their initial investment, along with the potential of not earning any return on their deposits, could consider a stocks and shares ISA. This allows investors to make tax-free deposits up to £20,000 for the 2020/21 tax year. More information about this type of investment can be found on our stocks and shares ISA chart.
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This one-year bond from Bank of London and The Middle East (BLME) pays an expected profit rate of 1.00% AER on its maturity, making it a good choice for those seeking a short-term home for their money. This account must be opened online and then operated by post. It has a minimum investment of £1,000, after which no further deposits can be made, and there is no access to funds prior to maturity. Savers must have or open a BLME transfer account to hold funds pending investment.
• Al Rayan Bank has the market-leading expected profit rate of 1.31% AER on the 18-month version of its Fixed Term Deposit account. This account can be both opened and operated online, in branch, by phone or using the Al Rayan app. The minimum opening balance is £5,000, after which no further deposits can be made and there is no access to funds prior to maturity. Interest is paid quarterly.
• Bank of London and The Middle East (BLME) is next with its 18-month Premier Deposit Account that pays an expected profit rate of 1.05% AER. This account requires a minimum investment of £1,000, with no further additions or withdrawals allowed. The account must be opened online and then operated by post. Savers must have or open a BLME transfer account to hold funds pending investment. Interest is paid on anniversary.
• Next up is Union Bank of India (UK) Ltd, with its 18-month Fixed Rate Deposit account paying 1.05% AER on maturity or yearly. This account can be both opened and operated in branch and by post, and the minimum investment is £1,000. No further additions are allowed and access is also not permitted, with the full 18-month term always having to be served.
Last month, decades-long planning regulations were changed so that those looking to convert a commercial property into a residential one now no longer need planning permission. This change, combined with the fact that many commercial landlords are struggling to find business tenants and the continuing residential housing crisis, means that buying a commercial property and converting it into a residential one could be a good investment opportunity.
What are the changes to the planning laws?
The new rules, which were introduced during September 2020, have removed the need to gain planning permission to turn vacant commercial properties, such as shops, into residential properties. As well as this, builders will no longer need the normal planning application to demolish and rebuild vacant and redundant residential and commercial buildings if they are rebuilt as homes.
How to fund this investment
Investors will likely struggle to get either a commercial or residential mortgage on the property when it is initially purchased, as such a bridging loan will likely be the best option. Moneyfacts.co.uk spoke to Michael Strange, managing director of Funding 365 Limited, who explained that he is expecting lending for this type of investment to be a huge growth area for the bridging industry over the coming years. As well as this, Strange revealed that this would be the type of project his company, and likely many other bridging lenders, would be happy to take a risk lending to.
According to Strange, the process of getting a bridging loan for this type of investment should be straightforward, although he advises investors to speak to the local council before approaching a bridging lender to see if it is a project that will get approval.
• The Mortgage Works has the lowest-priced deal with a rate of 1.19% that’s fixed to 30 November 2022 (4.5% APRC), before reverting to 4.74% variable for term. Available up to 65% loan-to-value (LTV), this mortgage comes with a 2% arrangement fee. There is a maximum of 10 properties allowed and rental income must be at least 125% of mortgage interest calculated with a managed rate of 5.50%.
• This deal from Birmingham Midshires Solutions is priced at 1.22% until 31 December 2022 (4.2% APRC), after which it will revert to 4.44% variable. It has a fee of £1,995 and is available to 60% LTV. There is a maximum of 10 properties allowed and rental income must be at least 125% of mortgage interest calculated with a managed rate of 5.50%.
• Halifax completes the top three with a rate of 1.40% that’s fixed until 28 February 2023 (4.2% APRC), before reverting to 4.44% variable for the remaining term. It’s available at a 60% LTV and comes with a fee of £1,495. There is a maximum of three properties allowed and rental income must be at least 125% of the mortgage interest calculated at a managed rate of 5.50%.
Note: We have selected the top three rates available from three different lenders.
*Excludes existing customer only or location specific products
Representative example: £168,000 mortgage over 25 years initially at 2.74% variable for 24 months reverting to 4.74% variable for term. 24 monthly payments of £774.14 and 276 monthly payments of £943.39. Total amount payable £279,290.00 includes loan amount, interest of £110,955, valuation fees of £185 and product fees of £0. The overall cost for comparison is 4.5% APRC representative.
DEAL OF THE WEEK
Two-Year fixed rate mortgage
This two-year fixed rate mortgage offering from Royal Bank of Scotland (RBS) has a rate of 1.38% that’s fixed to 31 December 2022 (3.3% APRC), after which it will revert to 3.59% variable for term. The deal is available at up to 60% loan-to-value (LTV) and comes with a fee of £995, but the incentive of £250 cashback goes some way to offset this.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Representative example: £218,000 mortgage over 25 years initially at 1.38% fixed for 26 months reverting to 3.59% variable for term. 26 monthly payments of £859.62 and 274 monthly payments of £1080.92. Total amount payable £319,919.20 includes loan amount, interest of £100,522, valuation fees of £352 and product fees of £995. The overall cost for comparison is 3.3% APRC representative.
Four offers where you can earn money
This week, NatWest launched a switching deal that will see new and existing customers earning £125 by switching accounts. Along with NatWest’s switching offer, four other providers offer customers switching incentives. Here we take a look at all the current switching incentives on offer.
NatWest – earn £125 by switching accounts
NatWest’s switching offer is available to both new and existing customers and enables them to earn £125 by switching to a NatWest current account. New customers have to choose either a Select or Rewards account, while existing customers can also choose Reward Silver, Reward Platinum or a Reward Black account. The switching offer lasts until 19 November 2020, although NatWest has urged customers to act quickly as the end date may be brought forward.
HSBC – earn £125 by switching accounts
Last month, HSBC launched a switching incentive that enables customers to earn £125 by switching to a HSBC Premier or Advance current account.
Royal Bank of Scotland – earn £100 by switching accounts
New and existing customers can earn £100 by switching to a Royal Bank of Scotland (RBS) account. Customers new to Royal Bank of Scotland can choose between a Select, Reward Silver, Reward Platinum or Reward Black account, while existing customers can choose one of the Reward accounts to earn the £100.
Metro Bank – earn £250 by referring friends
Metro Bank is offering customers up to £250 when they refer a friend to the bank through its Metro Bank Refer a Friend switching offer. The offer enables customers to earn £50 for every friend they refer to the bank, up to a limit of £250 (five people).
Policy Expert’s Home Premier buildings and contents cover earned a Five Star rating in the Moneyfacts Home Insurance Annual Star Ratings for 2020. The insurer also offers fixed pricing for two years to avoid any nasty surprises next year and its policies include new for old cover.
Nine out of 10 customers have saved money switching to Policy Expert*.
* Savings with Policy Expert: number of customers who reported savings when they switched their home insurance policies with Policy Expert, based on 2,641 survey responses carried out by QMetric Group Limited in February, 2020.