With negative interest rates, what happens to money in an offset account?

Discussion in 'Property Market Economics' started by jaybean, 24th Sep, 2020.

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  1. jaybean

    jaybean Well-Known Member

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    I've been reading about negative interest rates. Not that I think it would happen here, but I was just really curious.

    Anyway it got me thinking; does anyone have a sense of how money in an offset account might be treated in a situation like this? Would you be charged interest on this, as if it were in a regular savings account?

    On the one hand, if they didn't charge interest rates on it people could use it as a loop hole thus defeating the purpose of negative interest rates. On the other hand, if you penalise people for it, they will simply pay down their loans which seals that money away and also defeats the purpose of negative interest rates.

    (I know there's almost no historical precedent to base it off so I'm aware this is largely hypothetical)

    EDIT: I think I know the answer - banks would simply abolish the concept of an offset account. This product simply wouldn't make any sense in a negative interest rate environment.
     
  2. sumterrence

    sumterrence Well-Known Member

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    If we did go into negative interest rate era banks will start charging depositors for deposit services.
     
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  3. jaybean

    jaybean Well-Known Member

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    Yeah I know that's how it works with normal accounts but I wasn't sure whether offset accounts might be treated a little differently.
     
  4. sumterrence

    sumterrence Well-Known Member

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    I would say it just simply do nothing since there are no interest to offset.
     
  5. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Even if the RBA does cut rates further and the cash rate is negative, I doubt that the delivery rate to borrowers would become negative. The banks will always see to it that they take your money instead of giving you theirs.
     
  6. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

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    Negative interest rates are possible, although intellectually it is a head-grenade for me.

    What I think they will do is eventually take rates to zero, but target negative real rates, not negative nominal rates. This means they dodge the arithmetic incoherence of negative rates.
     
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  7. Gen-Y

    Gen-Y Well-Known Member

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    That is a good question - definitely above my pay grade. :eek:
     
  8. C-mac

    C-mac Well-Known Member

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    I have a question on this not so much on offset accounts but just savings more broadly (in a situation where consumer bank savings rates went into negative I.e. you pay the bank interest to store your money):

    1) If a mass bank-run for cash were to ensue in this situation; would a Greece-like event happen here, whereby ATMs are simply switched off altogether or limited to say $100 A day per customer? Asking because.. I've read a lot about how with the rollout of the new design bank notes now complete in Australia, they printed a lot less of them whilst also reducing the volume of old-design notes too. The net result being, much less physical cash in known circulation

    2) If a bank run were to occur, could an alternative be; to bsb/account number transfer your traditional banks' $$$ you have, OUT of that ADI altogether and IN to say a PayPal or TransferWise account? My understanding there is that since you don't pay or earn interest on money stored in such non-ADI accounts; then at least your savings would be safe-ish digitally - whereby you won't have to pay PayPal or TransferWise any interest, for storing your money there?
     
  9. Mark F

    Mark F Well-Known Member

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    Under the mattress is always one solution. :D
     
  10. Trainee

    Trainee Well-Known Member

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    If its purely a matter of a bank not having enough notes on hand, the government would just print more.
     
  11. C-mac

    C-mac Well-Known Member

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    Would your cash be safe from negative interest rates, in PayPal?
     
  12. sumterrence

    sumterrence Well-Known Member

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    I think we got confused here, negative rate would not affact the amount of cash you held. Yes it will affact the currency but you won't suddenly have less money. The value of your could change though.
     
  13. sumterrence

    sumterrence Well-Known Member

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  14. C-mac

    C-mac Well-Known Member

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    I know I know. But just theoretically I mean. If for example the interest rate on an ADI's savings account was say -0.25% (meaning you must pay the bank 0.25% interest per year on any savings held in your savings account); couldn't you just move your money to say PayPal to avoid having to pay a bank interest, yes?

    PayPal accounts store money. It doesn't earn you any interest but nor would you be charged interest in PayPal (as I understand it..)

    What I'm saying is: surely there would be a digital storage alternative to banks; in the event of negative (consumer!) interest rates, right?

    I know that's kinda one of the pros of a cryptocurrency.

    But for regular FIAT currency it kinda feels like Australia should have a nationalised bank like CBA used to be, especially in the digital age. A place that is secure and protected by gov, but wouldn't require you to pay interest to store your funds there in the event of a consumer-negative-interest-rate environment?

    And since we don't really have that gov-owned public bank in aus, I was guessing the next best thing would be PayPal?
     
  15. marty998

    marty998 Well-Known Member

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    The money you store with PayPal .... PayPal has to store it in a bank too.

    So if banks start charging PayPal for the privilege of storing money, you can bet it’ll come after you with increased fees to cover the problem.

    As it stands, if you’re keeping money with PayPal, PayPal is probably earning interest on your funds.
     
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  16. marty998

    marty998 Well-Known Member

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    I would suggest no one would keep their savings in an offset account at all. If the bank is going to credit your mortgage with negative interest each month, why the hell would you want to “earn” an equivalent amount of debit interest offsetting it.

    Negative interest rates are unconventional, but it may just be the kick up the arse the economy needs to get people to stop hoarding cash and start investing and spending again, provided the RBA can overcome the reverse psychology effect of people really believing everything is stuffed and therefore they start hoarding more cash.
     
  17. Illusivedreams

    Illusivedreams Well-Known Member

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    Depending on the currency and country where the funds are held.
     
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  18. jaybean

    jaybean Well-Known Member

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    That's the point of my thread, and I think almost everyone who has replied has completely missed what I was trying to discuss.

    You're 100% right, what is the point if you are penalized by roughly the same amount you are offsetting?

    As I said in my OP, my conclusion is that offset accounts as a product simply ceases to exist.
     
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  19. Jezzah

    Jezzah Well-Known Member

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    If you want people to stop hoarding cash you need to stop giving it to people who already have enough that they don't need to spend it. These low interest rates are just as bad as really high interest rates. We need more inflation to get to a better balance. I'm no economist so my simplistic view is likely laughable but to me the solution looks to be: Pump cash into the lower socio economic groups to drive big spending into the economy. The wealthy save and hoard while the poor spend just to stay afloat.

    How you would do the above? I don't know... raise the minimum wage while supporting small business and taxing the top end more? Force the super industry to offer fee free accounts to low income earners? As I said, simplistic and likely laughable.
    :)
     
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  20. Trainee

    Trainee Well-Known Member

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    Depends. If the loan has a negative rate, but so does the bank account, it might still make sense to have the offset.

    Would the negative interest on a loan be taxable income? While the interest paid on a bank account might not be deductible because it's used for personal purposes?