interest rates

Are Negative Interest Rates Imminent?

What does a negative interest rate mean?

Negative interest is an interest rate that falls below zero per cent. A negative interest rate is a reversal of how a bank typically works. Currently, most high street banks pay interest at a rate of 0.01 per cent. When negative interest rates occur, borrowers gain interest as opposed to paying interest to lenders.


Is the Bank of England setting negative rates?

Bailey set out to put minds at ease on a British Chambers of Commerce webinar. In an attempt to play down speculation, he disclosed that policymakers were only discussing negative interest rates to make sure that the option was there if necessary, not because they will be put in place imminently. He explained: 'It would be a cardinal sin in my view if we said we had a tool in the box which we didn't think could be operationally used...Yes, it's in the tool bag, but that doesn't mean we're going to use negative rates.'

As part of the research into its use, Bailey launched a study on whether the UK should set negative interest rates. The study reviews other countries who have implemented this, such as Japan and parts of the EU. The governor discussed other countries' experiences of negative rates, describing them as a 'mixed bag'. The effectiveness depended largely on the framework of each individual banking system as well as the time at which it was implemented.

On Tuesday, Bailey gave an online speech in which he hoped to clarify further that the bank had not decided whether rates will be set at below zero for the first time or settled any date for when this could happen. Whether the Bank of England is planning to push rates into the red remains unknown, but for now, it seems certain that Bailey wants to leave negative rates on the table.

How could this affect me?

If the Bank of England puts negative rates in place, commercial banks will be charged to hold cash deposits with them. As a result, banks will pass on these costs to the savers. With negative rates in place, your bank will most likely charge you to save with them, rather than paying you interest. It may also mean that borrowing, including mortgages, will become cheaper. Your credit card interest rates will probably depreciate as well. However, there is no guarantee that banks will pass on the benefit to the individual.


Why are negative interest rates being considered?

In theory, implementing negative rates would boost the economy. The aim is to encourage consumers and banks to use, borrow and lend money more freely and take more risks. If negative interest rates crush yields on savings accounts, people are far less likely to keep money tucked away in the bank and far more likely to spend or invest. As the second wave of COVID takes a thorough hit to the economy, the Bank of England is considering this option in hopes of reigniting the economy.


UK House Prices Jump By Five Per Cent 


They report the average asking cost for houses to be at £319,996 with monthly growth at 0.2 per cent in September. Scotland saw the most substantial increase in asking prices raised by 8.8 per cent to £168,272. Yorkshire and the Humber, as well as the North West of England, also saw significant growth with prices rising by 7.2 per cent (£210,128)  and  7.1 per cent (£212,977) respectively.


house prices
Average UK house price statistics published by Nationwide.


Both the East of England and the South East have already surpassed the number of sale agreements made in the same period last year. This is due to the fact that these areas have higher average prices. With more expensive properties, the stamp duty holiday introduced by the chancellor in July has more of an impact on buyers with possible savings of up to tens of thousands of pounds. This acts as an incentive for sellers to raise their asking price, knowing that the buyer is saving on stamp duty. 


Increased demand for three and four bedroom houses has also helped to drive UK housing prices. Director of property data at Rightmove Tim Bannister states: “Increased competition for second-stepper homes has pushed prices to a record this month for those looking to take the next step up the ladder". While most often the reason for moving house is needing more space, the increase in people working from home has created a higher demand for the same types of properties. As a result, different types of buyers are now finding themselves in competition for the same type of property. 


Another affect the pandemic is a surge of people looking to move out of major cities. More and more people are choosing to leave the capital altogether, but the outer areas of London are still active. Zone 1 has become less desirable as, with more people working remotely, the importance of living close to inner-city offices dwindles. York is one of the many areas seeing buyers coming from London, as it’s far cheaper in comparison. Many are choosing to sell up and move despite working in the capital because they will only be commuting once or twice a week. As a result, commuter belts are widening around London and all major cities. 


Before the pandemic, many would've assumed it impossible to leave the major cities in which they find their employment. Moving to the countryside to a larger or more desirable home is likely something many would never have considered an option. However, with the majority of people spending more time at home in recent months, more buyers are happy to compromise on city life and opt instead for extra indoor space or a garden. The option to work from home has created a wave of people looking to move to more affordable areas and own larger homes than they ever thought they could. Accordingly, demand for smaller houses with three and four bedrooms has grown, demonstrating that houses have become preferable over flats. 


property sales

Will Property Sales Continue To Recover?

When the market closed entirely during the lockdown in April, experts predicted the worst. However, pent-up demand has helped the market reopen on a strong foot. The stamp duty holiday introduced for nine months has also helped to spur interest. Buyers and sellers alike are keen to take advantage of the financial incentives which come with the higher tax threshold. It is evident now that buyers have started to make up for the lost time. 


In August, prices accelerated the most in one month for more than 16 years, according to Nationwide. They describe the sudden recovery as 'unexpectedly rapid'. Experts predict fewer than 1.1 million sales will complete this year, compared to each year from 2014 to 2019, where the number was around 1.2 million. Given the bleak outlook most held back during the lockdown, when house prices fell for four months consecutively, the figures are promising.



Nevertheless, the recent trend of high activity levels has begun to appear superficial and impermanent. Fears have begun to muster that the upwards trend will soon plummet. This is partially due to the tax break encouraging those who were intending to buy next year to advance their plans. This could create a vast drop in demand when the tax break ends in March 2021. Moreover, critics fear that the continually increasing likelihood of an imminent second lockdown may have an impending effect. Ongoing financial uncertainty and instability as a result of the pandemic have near but crushed consumer confidence. The reintroduction of national lockdown measures would be sure to topple the already fragile economy.


The question also remains whether first-time buyers are able or willing to enter such an uncertain atmosphere. These potential buyers have been some of the hardest hit financially by the coronavirus. As a result, this demographic is, for the most part, shut out of the market. The sudden kick-back into action also means that buyers experience delayed processes. High-demand causes mortgage processes to extend and become prolonged as banks and brokers deal with an excess of both back-dated and current requests. The property website Rightmove recently published estimates indicating that there are currently 40 percent more sales in progress than is typical for this time of year, resulting in delays. These setbacks, as well as the endless uncertainty, could cause consumers to lose confidence in the market and activity to plummet rapidly.



Will Buyer Caution Halt Mortgage Approvals?

Last month's statistics show a strong recovery for the housing market following the lockdown market freeze. Mortgage approvals were recorded at their highest level since 2007. According to the latest figures from the Bank of England, 84,715 home loans were signed off in August - up from 66,288 in July. This brought approval levels back to pre-pandemic statistics and the highest approval rate in nearly thirteen years. However, analysts are beginning to question whether the growing caution of buyers will halt this rising trend.

Government policies have helped to drive property sales during the pandemic. Current ultra-low borrowing rates have spurred interest amongst buyers. The stamp duty holiday, which will run until March 2021, makes buying a house now even more enticing. Extra sale listings have met the demand, sending mortgage approvals through the roof. High activity levels in the housing market are a sure sign of economic rebound following the lockdown.

The coronavirus has also spurred a scramble to purchase homes outside of large cities. The pandemic forced most of the nation to work from home, and there has been a resulting surge of people looking to move out of major cities. More and more people are choosing to leave London as they have realised the potential of working from home or commuting once or twice a week. The surge in mortgage approvals is partially due to many choosing to prioritise how much space they have in their homes over the densely populated inner-city locations. As a result, commuter belts are widening around London and all major cities. 

Despite the mortgage approval rate making a strong recovery, the Bank has stated that this only 'partially offsets' the lapse during the lockdown. Between March and June, approvals slumped to their lowest level since the early 1990s as the housing market halted. For comparison, 418,000 mortgages have been approved in 2020, while in 2019 524,000 were approved in the same previously recorded.

 In a usual year, without the impact of a pandemic, August is one of the quietest months for mortgage approvals in the UK. Typically, most of the nation is spending time abroad and on holiday. Due to the travel restrictions in place, most were unable to take their summer holidays and instead have been keen to take advantage of the financial incentives which come with choosing to move houses now. It is evident now that buyers have started to make up for the lost time.

However, as always, speculation is raised as to whether this rising trend will continue. Samuel Tombs, a chief UK economist, has described Google Trends data which indicated that the number of visitors to the three leading UK property websites fell by five per cent in September. Moreover, lenders have recently begun to restrict high-loan-to-value mortgage product sales. This move mainly concerns first-time buyers, whose interests are being pushed out of the property market. The change is sure to lower mortgage sales. 

Moreover, the set of buyers willing and able to make moves out of big cities or into larger homes is slowing. Concerns over the continuing financial impact of the virus rise with the onset of the second wave. Henry Pryor, a Property market consultant, expressed his view on the developing caution of buyers, saying: 'We may well run out of a pool of buyers prepared and able to move for lifestyle reasons as the flood of negative headlines about the true cost of the pandemic to individuals and the nation starts to become clearer.'

stamp duty

How Does The Stamp Duty Holiday Work?


What is stamp duty?

Stamp Duty Land Tax is a tax on the purchase of properties. Stamp duty is only paid in England and Northern Ireland. The devolved administrations of Scotland and Wales have alternative property taxes (Land and Buildings Transaction Tax and Land Transaction Tax, respectively). How much tax you owe the government depends on the property value, and where you are in the UK. The temporary changes to stamp duty currently in place only apply in England and Northern Ireland.


What has changed?

The threshold for stamp duty has been increased temporarily to £500,000 for properties in England and Northern Ireland. This applies to anyone purchasing their primary residence. If your property costs up to £500,000, you will not pay any stamp duty. Higher-value properties will only be taxed on their cost above that amount, potentially saving buyers tens of thousands of pounds.


stamp duty

Before the new policy was introduced in July, buyers paid stamp duty in England and Northern Ireland on land or property with a value of £125,000 or more. The first-time buyer discount allowed those entering the property market to pay no stamp duty up to £300,000 but is now replaced by the stamp duty holiday.

Landlords and second-home buyers will also see a tax cut but will still be eligible to pay the extra 3% stamp duty that has always been allocated to them. 


Who benefits? 

The stamp duty holiday was put in place to help buyers in a time when many are facing financial hardships as a result of the coronavirus. Chancellor Rishi Sunak has suggested that with the new policy, the average saved on a stamp duty bill is £4,500. Moreover, nearly nine out of ten home buyers this year will pay no stamp duty at all.

While it is aimed at buyers, homeowners are also benefiting and pocketing some extra money. With the policy in place, homeowners have more of an incentive to keep their asking price high, knowing that the buyer is saving on stamp duty. This is particularly significant with the sale of high-value properties which can run a stamp duty bill of tens of thousands of pounds. The stamp duty savings will likely end up being shared, with both buyers and sellers managing to save.


How have house prices been affected?

The Stamp Duty holiday intended to boost the property market after it took a hit during lockdown when house prices fell consecutively for four months. The stamp duty tax holiday has already taken effect by increasing house prices. In August, prices accelerated the most in one month for more than 16 years, according to Nationwide. They describe the sudden recovery as 'unexpectedly rapid'.

On the other hand, fears have begun to muster that the tax break will encourage those who were intending to buy next year to advance their plans. This could create a vast drop in demand when the tax break ends.



 When does the stamp duty holiday end?

The stamp duty holiday in England and Northern Ireland is nine-months long. It began in July 2020 and will end in March 2021. According to HMRC figures, the government usually raises around £12 billion annually from stamp duty land tax. Though, the tax holiday is set to cost the Treasury an estimated £3.8 billion.