Welcome to negative interest rates...where banks charge us for deposits!

What should we do in the topsy turvy world of negative interest rates and the looming US election?

Brace yourself for negative interest rates.

Yes, that’s right  - instead of being paid interest, savers are to be charged to put their money in a bank.

New customers of Digital Bank N26 who signed up after October 19 will have to pay half a percent interest on sums over €50k, the bank confirmed this weekend.

The bank said the move was due to the fact that it holds customer deposits with the European Central Bank “at a cost of -0.5% negative interest.”

The ECB cut interest rates below zero to boost spending in the economy. And N26 – which has 150k Irish customers - suggested all banks are under the same pressure.

N26 said: “All banks operating in Ireland are faced with the challenge of managing customer deposits in a sustainable way. 

So far Irish banks have resisted moving into controversial negative territory, however, they have instead hit customers by stealth by spreading charges and reducing free banking offers.Other banks are also already charging negative interest rates of - 0.65% to -1.1% to charities, companies and credit unions 

And savings rates for ordinary depositors are falling to zero with both AIB and Bank of Ireland and practically nothing with everyone else. Four banks currently pay just 0.01%.

But the reality is that we have been losing money on deposit for years.

Rates 'on demand' are on average a microscopic 0.01%.

But inflation has far outstripped interest rates for years, eroding the value our savings in an insidious way.

So what should we do?

Spend it?

We’ve been through two lockdowns and stashed away over €10bn in savings

Inflation alone is set to erode this new savings stash by over €100 million a year.

And that’s before banks start to charge us for deposits.

Christmas is also coming and hopefully the end of lockdown #2

So it sounds like it’s time for a spending splurge – if you are still employed with those extra thousands stashed away in reserve.

But why not do it responsibly and save our economy from disaster – by spending it on Irish goods and services, or at least with an Irish retailer.

The economic situation is grim, but it is not as bad as it seems.

At the last count, small and medium companies lost €12bn in the first lockdown – so in theory we could almost make up for this by spending the €10bn we stashed away on them instead of on cheap Chinese imports bought through the likes of Amazon.

Borrow it?

If interest rates are negative and banks charge us for savings, shouldn’t they be paying us to borrow money from them?

This is not as bizarre as it sounds. A bank in Denmark is paying customers interest on their mortgages.

But that’s Scandinavia. Here, we're a long way from getting paid by banks to borrow money.

Here they charge nearly double the average eurozone interest rate for mortgages. 

And we still have the same high rates on credit cards and loans we’ve been forking out for decades.

We pay up to 28% on credit cards and double-figure interest on personal loans.

Some retailers charge over 50% for overdue store credit (Jacamo, Simply Be) or 39.9% on finance deals (Littlewoods) - so much they have to register as moneylenders with the Central Bank.

Even our mortgages cost up to 4.5% (Bank of Ireland).

However, we don’t have to pay that much. There are plenty of better deals around.

 Low interest rates are being passed on - if we look for them.

You can potentially halve your mortgage rate by going to cheaper lenders like AIB, KBC and Avant Money.

You can get personal loans from credit unions as low as 5%. 

Many retailers also charge 0% for finance (Harvey Norman, EZ Living, Arnotts to name a few).

So, by all means borrow money but why pay 50% when you can pay 0%?

Save it?

While most banks offer nothing or derisory rates, An Post shines out as a beacon for desperate savings.

It is by far your best option by far for savings deals.

An Post still offers what seems in these stingy times a princely return of 16% over ten years on its Solidarity bonds and 5% over five years on savings certs and instalment savings. 

All of these returns are tax- free, i.e. there is no DIRT tax that could slash your interest by a third.

It’s also worth noting that you can still withdraw your money if you need it – and still earn interest. 

If you take it out after one year, you usually get 0.05%, which isn’t much but it’s still better than what most banks are paying now.

This rises to 0.5% after two years with the 5-year savings cert, then 0.85% after three, 1.9% after four. 

However, these prime rates may soon fall especially if more bank rates turn negative, so grab them while you can.

If you prefer to take a punt, prize bonds pay half a percent of the total fund in prizes every year – which is the equivalent to a half percent return.

What interest you can get for €50k on demand?

On Demand deposits Rate Annual return on €50k

An Post 0.15% €75

Ulster Bank 0.10% €50

AIB*/KBC/PTSB/EBS 0.01% €5

Bank of Ireland 0% €0

 *AIB is set to join BoI with 0% deposit accounts in January.

Best saving rates (all An Post)

On Demand deposits Full term rate Annual Rate (AER) Return on €50k

10 Year Solidarity bond 16% 1.5% €8000

5 year savings cert 5% 0.98% €2500

Instalment savings – 5 years 5.5% 0.98% n/a 

Prize bonds 0.5% (prizes) 0.5% None guaranteed

Invest it?

Yikes! This is a tricky time to invest – especially with the US election coming in two days’ time (see article elsewhere).

Yet there has been a record boom in people joining up to try their luck on investment platforms during the lockdown. 

If you are going down this route,  the best bet for amateur stock-pickers is to go for long term diverse holdings of ‘value’ stocks in funds with low charges. And to be aware of the many risks! 

The lowest-charge trading platform in Ireland is Dutch-based online platform De Giro, where you can buy shares and funds for minimal fees.

But what should you buy? Day trading – where you target short term gains on individual shares - is a mug’s game. The big traders have the edge here in speed of trading, experience and knowledge.

A better bet for beginners is to buy funds that invest in a wide range of shares. 

Some of these are managed by professionals who buy and sell the assets in them. But you have to pay for that expertise with charges of 1% and more.

Another increasingly popular type of fund is an Exchange Traded Fund. This is like a single share that owns a great many other shares, which may represent a sector, a commodity like gold, or a particular stock market.

They are not managed but are cheap  – costing 40% of what managed funds charge - and can be bought and sold like individual shares. 

Worldwide, more than €5 trillion is invested in them. 

You can also use ETF’s to target certain areas – like ethical or technology companies.

Pay off your mortgage early

Most people are paying over three percent for their mortgage. And that really adds up over the long time it takes to repay a home loan.

Repaying your mortgage early with your money makes a hell go a lot more sense than paying a bank to mind your money.