16 Oct What Do Negative Interest Rates Mean
With the RBA slashing the cash rate for the third time in five months, it is now at record low of 0.75%. At this point, is a negative interest rate possible? What could it mean for you?
When you apply for a home loan, your interest rate will dictate how much will you pay your lender. On the other hand, if you have money in your savings account, the interest rate will determine how much will your money earns. Negative interest rates are usually introduced when a country’s economy is experiencing low or negative growth, unemployment is too high, wages aren’t going up, people aren’t spending money and prices aren’t increasing. Then, the central bank will take steps in encouraging consumers to borrow and spend more.
Negative Interest Rates
Interest rates are usually positive, meaning people earn interest on their savings and have to pay it when they borrow. But with negative interest rates (financial institutions apply to people borrowing money or putting it in savings fall below zero), instead of gaining interest on amounts left in your bank account, you actually lose money. And when you borrow money from a lender, instead of paying the interest rate, you will actually get paid.
Who will benefit and who will suffer
The primary ‘winners’ for this potential negative cash rate are Australians looking at securing a loan. Lower interest rates mean less interest to pay back on money borrowed from lenders. Negative interest rates could mean a bank paying you to borrow money from it. Tourists in Australia can also benefit from this since lower interest rates can weaken the currency. Buying Aussie dollars could become cheaper for them.
Potential ‘losers,’ on the other hand are savers and retirees. A negative interest rate means losing money if you have funds in a savings account. Pensioners can also be negatively affected by negative rates especially those who depend on income from savings accounts or term deposits.
When can I get the money?
Before you’ll see any money earned on your home loan, the RBA would first need to decree the negative interest rate policy. Once that happens, commercial banks would then need to update their policies and then apply it to existing customers.
Source: Lifehacker article
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