On banks paying interest to people with mortgages or how NOT to run a banking operation

I was just listening to BBC’s Business Daily podcast and they were interviewing someone in regards to government bonds. The piece finished saying that “in normal circumstances we are all interested in the return ON the investment, but that with falling values along the whole asset spectrum, the interest fell now on the return OF the investment”.

I continued doing the rounds with my financial paperwork and I bumped into a buy-to-let mortgage I’m being charged at:

a variable rate which is 0.56% below the Bank of England base rate, currently 5.75%, for 24 months, to give a current rate payable of 5.19%. When the Bank of England base rate changes, the interest rate on your loan will change on the 1st of the following month.

Half way through the deal, the BoE base rate is currently down to 1.5%. Who was to expect such a drop? Certainly not me, specially after the inflationary first half of 2008.

But the US Federal Reserve had taken rates down to 0-0.25% (whatever that means) and the Bank of England is getting pressure from both sides, to keep lowering and to increase rates to avoid inflation. It seems that so far, the former is winning.

Then I thought, what happens if the BoE base rate goes down to 0.5% or below? Is the bank going to pay me for having a mortgage with them?

The terms and conditions of the mortgage say a lot the property being repossessed if I don’t pay but nothing about  what happens if interest rates drop to the point where they OWE me money.

Another bad decision of our banks? Probably, but I guess they’ve got that little clause they keep for emergencies as such… but at least the thought relieves me of some lower back pain and tightness of shoulders.



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