Bank of England's negative interest rates could see mortgage prices fall further

Just when it seemed that mortgage rates were as low as they can go the Bank of England is now considering negative interest rates. With the Government's funding for lending scheme rates have fallen through the floor in the last few months hitting jaw-dropping lows on two and five-year fixed rates.

The competition among lenders is fierce and with the cheap money being pumped into banks by the Government they can afford to pass on low rates.

Lenders appear to have abandoned cutting rates by small amounts and have begun to slash 0.5% off huge swathes of their products to keep up.

And now with the central bank seriously considering negative interest rates it could go even lower and make the best current mortgage rate a very fluid concept.

What do negative interest rates mean?

In theory negative interest rates would mean depositors paying their bank to hold their money. It would be an inversion of all banking experience you have previously known and, naturally, hammer savers.

With inflation running around 3% and savers' rates running around 2%, the cost of living is outstripping the saving rates. This is already a negative interest rate in real terms.

But if the Bank of England were to adopt actual, or nominal, negative interest rates then it could have a huge impact.

For mortgages the first impact would hit tracker deals associated with the Bank of England base rate which would go even lower than now.

A tracker mortgage of 1% above base rate, for example, is currently paying a stunningly low 1.5% a year but if interest rates fell to -0.5% the annual rate would only be 0.5%.

Lenders are already suffering from these cheap deals and desperately trying to shift them, which is one reason fixed rates have fallen in price.

With negative interest rates the need would become even more crucial and perhaps force fixed rates even lower to tease borrowers offer their cheap rates with the offer of certainty.

The other impact would surely come for those borrowers on standard variable rates. Last year Halifax, Santander and many others raised their SVRs in response to ultra-low interest rates.

Halifax, for instance, increased their rate from 3.5% to 3.99%, at the current 0.5% base rate, hitting 200,000 homeowners.

The move was designed to make up some of the money lost on the low base rate as the central bank signalled it would stay low for some time.

If Halifax felt 200,000 borrowers at 3.5% was unaffordable then a drop to -0.5% interest rates would also be unaffordable and the SVR would likely rise again.

What to do about negative rates?

The old certainties of a best current mortgage rate is much more difficult to navigate now as the rules are turned on their head in a financial crisis.

An expert mortgage broker can guide you through this new complex financial world that feels so different and explain that the premium for fixed rate deals could be less than previous.

A broker will also be able to warn you that banks can increase SVRs with very little warning, tracker rates can fall and even though mortgage rates are at their lowest levels, they can fall further.

In 2005 it may have just about been possible to look at a best buy table and get a sense of the best current mortgage rate but today the market is much trickier to navigate.