How negative rates would affect savings and mortgages Why is the Bank of England considering cutting to negative rates? It has tried a number of ways to kick-start Britain's recovery and, with continuing economic stagnation, the Bank is thinking up more imaginative options. It has stressed that the notion of negative interest rates was just part of its "blue-sky thinking." What has the Bank done so far? Plenty of damage, if you ask a saver. Governor Sir Mervyn King and other members of the Bank's Monetary Policy Committee (MPC) have repeatedly dipped into their armoury to fight the prolonged slump in the UK economy. First, the UK Bank Rate was reduced from 5pc in late 2008 to 0.5pc in March 2009 in an attempt to stimulate demand by cutting borrowing rates. A programme of quantitative easing was simultaneously begun. This involved the Bank electronically creating money and using it to buy assets - government bonds, known as gilts, from financial institutions. It was hoped that the money realised by the sale of these gilts was then lent out in the economy. The increased demand for gilts boosts their price and decreases the yield. It is the yield on these gilts which is most influential in the wider pricing of borrowing rates - those paid by consumers and businesses. Initially this was £75bn but was eventually expanded to £375bn. It hasn't been extended since last July. Why haven't low rates and QE worked? The Bank has argued that they have, or at least that they have helped stabilise the economy. In a research paper submitted to MPs last year, it estimated that the value of shares and bonds had risen by £600bn as a result of the policy, equivalent to £10,000 for each household in the UK, and that 40pc of the gains went to the richest 5pc of households. However, the Bank's policies have also inflicted severe damage on the prudent - those who carefully saved. The returns on their nest eggs were destroyed by low rates and then worsened by QE and the Bank's newest tool - the Funding for Lending Scheme (FLS). The FLS, launched last summer, offered up £80bn of loans to banks and building societies at rock-bottom rates, as low as 0.25pc. This, of course, left them in even less need of deposits from savers and so rates have been duly cut again, most sharply in the past two months. QE also created a highly damaging affect on pension incomes because rates on annuities - policies that pay an income for life in exchange for a pension pot - are linked to gilts. As gilt yields were depressed by QE, so were the annuity rates being offered to those reaching retirement. Finally, the Bank's policies have also created inflation, which erodes the buying power of savings. The consumer prices index went as high as 5.2pc in 2011. That is why the MPC is considering all options. The holy grail is to find a policy that stimulates demand without causing to much damage. How Bank action has pushed down fixed savings rates The FLS scheme began in August 2012 Could negative interest rates achieve that? One option is to keep the Bank Rate at 0.5pc but cut the rate paid to banks on the money they keep in the Bank's vaults. All banks keep their reserve with the central bank, which pays a rate of 0.5pc - the Bank Rate. But the MPC could consider paying that rate on a certain amount of reserves and then apply a negative rate - effectively a charge - on any money a bank keeps stashed beyond that limit. This would give the bank a forceful incentive to lend money rather than sit on it. Would this cut savings rates? Offering a lower reserve rate to banks would be less likely to harm savings rates than an outright Bank Rate cut, but it would still apply pressure. Even the notion of it was enough to move money markets where "swaps" are traded. This is the market for banks to buy and sell money - as swaps - and which has a strong sway on the rates on fixed-rates savings and mortgages. One-year swaps, which traded at 1.37pc last May before the FLS, fell from 0.61pc to 0.58pc on the mere whiff of negative rates. Five-year swaps, which affect the pricing of five-year mortgages and savings bonds, fell from 1.09pc to 1.04pc. They traded at 1.70pc last May. Importantly, the rates did not rise when Charlie Bean, another Bank deputy governor, tried the next day to play down the chances of negative rates. The market, it could be concluded, believes it remains a possibility. Either way, those all-time lows for swap prices, if they don't improve, will begin to be priced into fixed mortgage and savings products in coming weeks. So why not just cut the Bank Rate? The MPC has previously expressed concern on the implications of reducing the Bank Rate below 0.5pc. Lower rates would heap pressure on building societies, expected to earn a return for their members on the gap between mortgage rates and savings rates. Another Bank Rate cut could send some to the wall, which would test financial stability and undermine the whole point of rate cuts - to increase lending. Will a "tracker mortgage" pay you for borrowing? Tracker mortgages are held by millions of borrowers. Many will be wondering if these mortgages, which should slavishly follow the Bank Rate, might follow it into negative territory. In theory, that could mean a lender having to pay you for having a mortgage. Most tracker deals are priced at a substantial premium to the Bank Rate and carry a "collar." This a minimum level they will track down to. But before the credit crisis began in 2007, some lenders offered deals that track far more closely, track for life and have no collar. David Hollingworth of broker London & Country said: "Bank of England base rate was cut then tracker borrowers will clearly be expecting to see their mortgage rate and payments drop in line. That is likely to hold true for those with older tracker mortgages that may not carry any collar on the interest rate. Some ultra-low trackers were less than a quarter per cent below base rate. So if base rate fell to a negative level, that would in theory result in a negative pay rate, although in reality borrowers shouldn't expect to receive interest on their mortgage. Mr Hollingworth said some trackers were already caught at their collar rate. Among popular tracker deals of recent years, he said Yorkshire Building Society's two-year deal tracks at 1.94pc above Bank Rate, giving a current rate of 2.44pc, but is collared at 2.44pc. Nationwide has a "tracker floor" clause that effectively means it can choose to ignore a negative base rate. It currently offers a two-year deal at 1.84pc above Bank Rate. The lowest rate it could reach would be 1.84pc even if base was -0.25pc, said Mr Hollingworth. A deposit rate cut, which wouldn't affect tracker mortgages, is a far more likely option than a Bank Rate cut if the MPC were to go down the route of negative interest rates.