With only 10 basis points separating the Reserve Bank of Australia’s cash rate from zero, and the economic impacts of COVID-19 likely to be felt for a long time, we may see negative interest rates in the future.

And as a Denmark bank announced yesterday that it was now offering 20-year home loans at zero per cent interest, you may be wondering what would a negative interest rate environment look like in Australia?

Would your lender be paying you to have a home loan with them? Would your savings account provider charge you for the privilege of storing your money?

Without a crystal ball it’s hard to say if, or when this may happen. But if the cash rate were to plummet to, or below, zero, it’s worth exploring how it might affect your finances.

What are negative interest rates?

First and foremost, we need to look at what most significantly impacts interest rates – the cash rate. The Reserve Bank of Australia meets to set the cash rate on the first Tuesday of each month (except for January). They may make the decision to raise, lower or hold the cash rate on that date.

Banks, credit unions, neobanks and pretty much any licenced institution offering financial products may use this to dictate their own interest rates. A cut to the cash rate typically means a similar cut to variable home loan mortgage rates, term deposit rates and saving account rates. On the flip side, an increase would indicate to providers to lift these rates.

If the cash rate were to plunge below zero, this may mean that providers will move interest rates into negative territory.

This has happened in other countries before. Several central banks, including those in Japan, Denmark, Sweden, Switzerland and the European Central Bank have seen rates plunge into the negatives. This practice is done typically to try and kickstart economies that have been declining.

Put simply, the idea is that negative rates will encourage businesses to borrow more money and invest it back into the economy. But this unfortunately can backfire, leading to an increase in cash hoarding as everyday customers feel too uncertain about the economy to spend, and also fear their deposits or cash aren’t earning real returns.

The biggest concerns are that negative rates would impact a bank’s profitability, and that savers may start hiding cash under their mattress to avoid paying their bank to hold their money.

After all, why keep money in a bank that may charge you for the benefit of keeping it there?

What happens to your mortgage?

So, what actually may happen to your mortgage if we entered an environment of negative interest rates?

If the cash rate were to cut to zero or below, and you were on a fixed-rate home loan, nothing would change for you right away. But there may be long-term consequences, depending on what the market looks like once your fixed term has ended.

While variable-rate home loan customers may see immediate change in their mortgage repayments, there may be terms and conditions limiting your home loan from falling below a certain interest rate percentage, like 1 per cent. You may need to speak to your lender or look through your own home loan’s terms and conditions to see if this is the case.

If we look globally, Denmark actually had a bank offer negative interest rates of -0.5 per cent last year. But this doesn’t mean borrowers are being paid to take out a mortgage. When you factor in fees borrowers are still owing money on the loan.

However, Danish lender Nordea Bank Abp announced that as of Tuesday, customers can now apply for 20-year home loans with an interest rate of zero per cent.

In Australia, home loan rates hitting 1 per cent or lower would mean mortgages have historically never been more affordable, making it a great time to try and get on top of your debt. If your home loan interest rate drops, consider making the same repayments as if you were still on a higher interest rate (if this feature is allowed in your home loan). This may help you to chip away at your balance faster.

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What happens to your savings?

Currently, some of the biggest banks in Australia are paying ongoing savings rates under 1 per cent. But could savings rates ever fall into negatives, meaning you’d pay interest to your bank to securely store your money for you?

Unfortunately, there is no clear answer at this point. But it may be something that savers experience in the form of an ongoing fee, instead of an ongoing interest rate. This is similar to many home loan or personal loan providers who charge customers annual fees and other ongoing costs.

If this were to happen, we may see savers seriously hurting in a negative rate environment. Worse, we may see an increase in Aussies withdrawing their cash and securely storing it at home to avoid these potential ongoing costs.

High interest rate savings accounts

What happens to your credit card?

When it comes to negative interest rates, credit cards are an entirely different story. Historically, the cash rate does not impact the interest rates of credit cards. In fact, credit cards are still charging interest rates as high as the cash rate once was in the ‘90s – with the average card rate sitting around 16 per cent.

If you, like much the rest of the world, are looking for a way to get paid to spend money, it’s unlikely you’ll see negative credit card rates making this happen.

In fact, if you want an alternative to costly interest rate charges but with the benefit of part-paying purchases, you may be better off considering if a buy-now-pay-later service, like Afterpay or ZipPay, is right for you.

If you enjoy the flexibility and freedom of a credit card but want to see your interest rate drop, you may need to take action into your own hands, as waiting for negative credit card interest rates is a fool’s errand.

There are currently 16 credit cards offering interest rates under 10 per cent. Switching to a low rate, low fee credit card option may be worth considering if you’re fed up with your current card’s costs.

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