Negative interest rates: What are they & how to avoid them?

What was once unthinkable is now being practiced by more and more banks – they’re charging negative interest on savings. We’ve settled for little to no interest on the balance in our savings account for a long time, but now our savings are facing a kind of “penalty”.

As an investor, this concept can be difficult to understand. You’re probably asking yourself, “Why do I have to pay interest on my savings?”, because until now, we’ve been used to banks only charging interest if you get something from them – for example, taking out a loan. But now, should we really be paying for the bank to hold our money?

In this guide, you’ll find out how this came about, what exactly negative interest rates are, and how you can avoid them. 

What are negative interest rates?

At first glance, it’s difficult to understand why you have to pay penalties on your bank balance, but this can be simply explained. German banks deposit their capital (i.e. your money) with the European Central Bank (ECB). For some time now, the ECB has been imposing negative interest rates on this capital, in order to boost the economy.

The idea is that if banks deposit less money with the ECB, they can instead make it available to their customers as loans – and possibly on more attractive terms. This means people have more money at their disposal and can use it for new purchases or fulfil long-awaited wishes. All of this spending ultimately boosts the economy.

Unfortunately, the ECB’s plan has not been fully implemented because, in reality, the banks simply charge the negative interest rates from the ECB to their customers and penalise savings deposits with this so-called “custodial fee”.

Which banks charge negative interest rates and how do they do this?

Some banks charge negative interest primarily to new customers, who must accept the new terms and conditions when opening an account. Other banks, including well-known financial institutions such as Deutsche Bank and a wide range of savings banks, have drawn up new rules to charge negative interest rates to existing customers who have been with them for decades. If you don’t sign the changed terms, the bank could terminate your account.

According to a survey conducted by the consumer portal biallo.de, more than 480 out of 1,300 financial institutions surveyed now charge negative interest rates to their private customers. This is usually -0.5%, which is the same percentage that the ECB demands from German financial institutions.

In comparison, in the summer of 2019 only 30 of the 1,300 financial institutions surveyed charged negative interest rates on the accounts of individual customers. This means that the number has increased more than sixteen times in two years. Even the exemptions from custodial fees have become harder to get over time. A few years ago, negative interest rates were mostly charged on savings deposits with a six-figure sum, but they’re now charged on a savings balance of EUR 5,000 or, at some banks, from the first euro!

Are savings without negative interest rates still worthwhile?

There’s no question: negative interest rates are anything but worthwhile. But what about savings on which even a small amount of interest is paid? Let’s digress a little.

All the goods on the market – that is, everything you buy as products and services – tends to become more expensive over time. 

At present, the rate of inflation (the percentage by which products and services become more expensive) is 3% per year. This means that in 2021, on average, goods cost 3% more than they did a year ago. This means that you can afford less with the same amount of money than you could a year ago – in business language, this is called a loss of purchasing power.

In many cases, the interest rate shown on your savings balance (taking the inflation rate into account) results in a negative real interest rate. Specifically, this means that if inflation rises faster than the interest rate on your savings account, your money will lose value. 

Caution should be taken with financial institutions that don’t publicly declare their intentions to charge negative interest rates but collect them from their customers via hidden costs – through the back door, so to speak. In recent years, some banks have introduced or gradually increased account fees on savings or day-to-day accounts. For you as a consumer, this once again means that over time your savings account balance will become less and less valuable. 

What to do if your bank introduces negative interest rates

You may have already received a customer letter from your bank requesting your consent to introduce negative interest rates. First of all, you are not obliged to respond immediately to such a letter from your bank and to give your consent to the modified fee regulation.

You can delay the process somewhat and ignore such a letter until the specified deadline is reached. However, sooner or later, the bank has the upper hand and can exercise the right to terminate your account. 

You really only have three ways to respond to your bank introducing negative interest rates:

1. Pay the custodial fee.
2. Look for a new bank that does not charge negative interest rates – although these are becoming harder to find.
3. Distribute your money to different banks in amounts that are below the negative interest limits.
4. Choose an alternative investment.

If you choose the 4th option, you should still be careful. Many bank advisors use supposed informative discussions about negative interest rates to sell alternative, often significantly overpriced, financial products. It’s best to know in advance whether your bank’s offers are attractive to you or whether you’d rather look for a completely new type of investment instead. 

Inyova’s response to negative interest rates

An investment in the stock market is a way to escape negative interest and generate long-term returns instead.

Of course, there’s no guarantee that your investment in stocks will continue to gain value. However, long-term studies have shown that you can achieve average annual returns of around 6% with a medium to long-term investment strategy.

You don’t have to be a stock guru or rich to invest in stocks. Small amounts are enough to achieve financial success step by step. This makes it easy for first-time investors in particular to invest in stocks. You can invest your money responsibly in a sustainable future without compromise and make the world a better place.

Thanks to the intuitive Inyova online tool, you can choose from a wide range of investment topics that best suit you and your values, such as renewable energy and reducing emissions, gender equality and social responsibility. Inyova will then put together a list of companies that are tailored to your needs, personal risk appetite, and financial goals.

In the meantime, we have resigned ourselves to the fact that a savings account is no longer an attractive place to keep money in the long term. With the introduction of negative interest rates, savings accounts have become even less of a useful option. Instead, with an Inyova investment you can make a big impact with small amounts of money. Create your free investment strategy today.