What’s the deal for your personal finances if there’s a no-deal Brexit?

Amid warnings of dire consequences, here’s how to cope if it does become a reality
The pound’s fall since the EU vote has benefited tourists coming to the UK, but not Brits going abroad.
The pound’s fall since the EU vote has benefited tourists coming to the UK, but not Brits going abroad. Photograph: Dan Kitwood/Getty Images

The currency markets have been doing little to allow British holidaymakers to enjoy a relaxing summer. The pound recently slumped to its lowest level against the dollar and the euro so far this year, meaning a break away just got more expensive.

Behind that slump was the growing possibility that talks between London and Brussels will break down over the coming months and the UK risks leaving the EU with no deal in place. Bank of England governor Mark Carney has warned that the prospects of this happening are “uncomfortably high” and should be avoided at all costs. But if that no-deal does, indeed, become a reality, what will be the impact on the rest of our personal finances?

Pensions

An economic upheaval would affect pensions in some ways. Workers could be less able to invest in long-term savings, and there is the possibility that a squeeze on taxes would affect the ability of the government to pay for the pensions “triple lock”, which guarantees a minimum increase in the state pension each year, according to Steve Webb, director of policy at pensions investment company Royal London.

At present, hundreds of thousands of British expat pensioners live in EU countries and get their UK pensions paid and annually uprated as the UK has a reciprocal social security agreement.

“There is a risk that if there was a hostile ending of relationships between the UK and the EU, these reciprocal uprating arrangements could break down, and expat pensioners might miss out on annual upratings. Ministers assure us that a deal will be done. But it’s hard to know what a world of poor inter-governmental relationships would look like post-Brexit,” says Webb.

Rates on annuities – which guarantee an income for life – dropped to record lows when the referendum results came through, and some providers pulled out of the market, although rates are now rising slowly, says Rachel Springall of financial data provider Moneyfacts.

With the prospect of no deal, risk-averse retirees could be wise to invest sooner rather than later, says Moira O’Neill of Interactive Investor, an online trading and investment platform. “If you need income, but can delay buying an annuity for a few years – which might be a good idea, as the rates improve as you get older – look at a drawdown arrangement,” she says.

“Since the pension freedoms were introduced in April 2015, growing numbers of people have opted for drawdown schemes, whereby they can take sums directly out of their pension pot as income, while leaving the rest invested. A no-deal Brexit could give investors a bumpy ride, so those in drawdown should consider not eating into their capital, to allow it to recover.

“It’s best, if you can, to only take the ‘natural yield’ – that’s the actual income earned by the investments. For example, dividends on shares or interest or ‘coupon’ paid by bonds.”

Currency

The slump in the value of sterling earlier this month came as investors looked to protect themselves against the possibility of a collapse in talks, and there have been predictions that the pound will continue to fall in the coming months. Last week, foreign secretary Jeremy Hunt said that a no-deal Brexit could result in a sharp fall in the value of sterling.

“If a no-deal Brexit does become a reality, you’ll struggle to find many who don’t foresee the consequences as being pretty dire. There doesn’t seem to be very many positives, in the short term at least, and the many negatives would almost certainly far outweigh them,” says David Lamb, head of dealing at Fexco Corporate Payments.

Some analysts have a brighter outlook. US investment bank Morgan Stanley says Britain is likely to secure a deal with the EU and that the pound will strengthen by the end of the year.

Savings

The Bank of England gave some long-awaited relief to savers at the beginning of this month when it raised rates above the emergency level introduced after the financial crisis. Mark Carney, however, signalled his willingness to reverse the quarter-point increase in the event of a disorderly Brexit.

“Savers who have their money in cash may see their returns fall … which would be devastating to those who rely on their savings to supplement their income,” adds Springall.

Those with investments in the stock market – through shares or shares-based Isas – could face the prospect of turmoil on the exchanges if there is no deal and companies struggle to cope with the repercussions.

“Many Isa savers associate investments with uncertainty and caution, but too much caution can have a negative impact on your money. And although we’ve seen a small rise in interest rates, keeping your money in cash is just guaranteeing that it loses value,” says O’Neill. “On the other hand, if you put too much of your cash into high-risk options such as stocks and shares, you put yourself at the mercy of market fluctuations – and a no-deal Brexit could mean a big drop in the value of investments.”

Housing market

House-price growth slowed in June to the lowest annual rate in five years, driven by falling prices in London, according to the Office for National Statistics last week.

A few days earlier, estate agent Savills posted an 18% drop in half-year profits and warned that deadlocked negotiations made it difficult to make predictions for the rest of the year.

A no-deal Brexit would be “disastrous”, according to Neal Hudson, housing analyst at Residential Analysts, with the possibility of a crash as a result of rising inflation, job losses and a recession. Others argue that a paralysis of the market is not necessarily a given. “Although we saw some evidence of a reaction from homebuyers after the vote, with a few putting a move on hold or pulling out, it was very short-lived and only affected a small minority.

“In most cases, homeowners have tended to decide not to put everything on hold over a potentially protracted period,” says David Hollingworth of London & County.

He believes that while the uncertainty has led to a slowdown of price growth in some regions, other factors are at play, such as affordability and tighter buy-to-let rules.

He adds: “Currently, low mortgage rates and low unemployment means there is a solid foundation. Of course, there could be speculation around organisations shifting job locations, for example in financial services, which could have a knock on for house prices. But even then, it may be regionalised and limited in scope.”

A varied portfolio

Despite the signs of gloom, Brexit does not have to be a disaster for personal finances, according to O’Neill. Instead, money has to be invested to avoid any turbulence.

“This means spreading your money between UK and overseas investments, plus buying lots of different types of investments, such as company shares, commercial property, government and corporate bonds, plus gold. You can buy funds that specialise in these areas. Funds will pool your money with that of other investors to give exposure to more investments than you could buy by yourself,” she says.

“The alternative is keeping your money in the bank, where it may be safer, but doesn’t have the potential to grow. If you use Brexit as a reason to delay or stop investing, you’ll probably find another reason afterwards. You can always find something that makes you feel nervous about investing.”


Interest Rate Rise Results in Drop in Planned Home Moves

Homeowners more concerned with mortgage rates than house prices due to Bank of England decision….

 

The Bank of England’s decision to increase interest rates may have deterred homeowners from moving, according to new research from AA Financial Services.

Throughout 2018, the proportion of adult homeowners planning a move in the next six months had stayed consistent at 8%.

However, in the 48 hours following the interest rate rise by the Bank’s Monetary Policy Committee, this fell to 6%.

The AA’s research analysed future demand for property by tracking homeowners’ intentions to move, including the timescale for the move, how much they planned to spend on it, and which regions they were planning to move to and from.

In its most recent figures, collated in July before the interest rate rise was announced, the AA predicted 2018’s summer would experience a high in property confidence, and expected a notable increase in the number of homeowners planning a move over the coming three months.

It also found that the average planned spend on a new home move jumped to in June, up from recorded in April.

Additionally, the July data revealed that 34% of renters were planning to buy a home in the Summer, up from 28% in the Spring, despite concerns regarding property supply.

Commenting on the figures, David Searle, Managing Director at AA Financial Services, said home movers were now concerned more with mortgage costs than house price trends as a result of the interest rate rise.

“After years of record low interest rates, last week’s rise – and indications that more is yet to come – mean that the cost of buying a home is going to get more expensive.

“Given many people are moving home to save money, release equity or to make their money go a bit further it seems that, for some, the reality of living with rate rises may well temper their plans to move in the short term.”


Savers ‘missing out on better rates’

Since Thursday’s rise there has been very little movement in rates, although generally it takes at least a week for any rises to be announced and a month for any of those better returns to take effect.

Tom Adams, of comparison site Savings Champion, said that rather than waiting, many people could get a much better deal by moving off an old deal that might pay about 0.5% in interest, or as little as 0.05%, to one of the better buys.

The leading rates for instant access savings accounts are well over 1% so, for many, simply switching to a new savings account would be more lucrative than hoping the base rate increase is passed on to their existing account.

“This year we have seen competition between the newer challenger banks rather than the big High Street names,” he said.

The reason for this, in part, is that the largest banks, particularly, did not need to attract savers. They had money sloshing around from schemes that allowed them access to cheap funds to lend out.

Challenge for customers

The competition view was echoed by Bank governor Mr Carney, who told BBC’s Today programme on Friday that while competition was not the Bank’s direct responsibility, it had created a better-prepared wicket for this to be played out.

“In order to have competition, you need all of the banks to be healthy,” he said.

“That required a lot of repair post-crisis, and… you need a lot of new banks in the system, so we’ve authorised 40 more banks.”

The City regulator has suggested that a minimum savings rate should be considered for longstanding customers, but a widely held view is that savers need to ditch their loyalty and move their funds around.

However Mick McAteer, director of the Financial Inclusion Centre, said that switching would not benefit many households with squeezed finances.

He said many millions of savers did not have sufficient amounts tucked away for a small rise in interest to make much of an impact.

Even a 1% rise in the savings interest rate would only add 20p a week or so to many people’s savings, he said, which was an “immaterial rise” and one that would do little to encourage people to save more.


Interest rate rise UK: Bank of England raises rate to 0.75 per cent in August 2018 – what does it mean for your mortgage?

Around a third of London, borrowers could see the cost of their mortgages rise by hundreds of pounds following August’s interest rate rise.

The Bank of England has voted unanimously to raise UK interest rates to their highest level in almost ten years.

The decision to raise the base rate to 0.75 per cent from 0.5 per cent pushes the Bank rate to its highest level since March 2009.

It is only the second Bank rate rise since the financial crisis in 2008, after a rise in November 2017 pushed interest rates back up from a historic low of 0.25 per cent to 0.5 per cent.

Today’s announcement will come as little surprise after most economists predicted the monetary policy committee’s decision.

The Bank of England raised interest rates today to the highest level for more than nine years

Another interest rate rise of 0.25 per cent was widely expected to take interest rates to 0.75 per cent in May.

However, the disruption caused by the “Beast from the East” that hit this March led to the economy growing by just 0.1 per cent in the first three months of the year and the Bank opted to keep interest rates at 0.5 per cent.

Two more rate rises are expected in 2019 and 2020.

Will I still be able to afford my mortgage after today’s interest rate rise?

“According to Nationwide Building Society, only a third of London borrowers are on variable rates. This means the vast majority of borrowers will see no impact on their mortgage payments have taken advantage of the low fixed rates that have been on offer,” said Colin Payne, associate director at Chapelgate Private Finance.

However, the third of London homeowners on variable rates will see their average mortgage payments pushed up by more than £300 a year as a result of the rise.

Today’s interest rate rise will push up the average mortgage by £26 per month to £1,180, further squeezing household incomes.

 

“In real terms, wage rates are still at levels prevailing in 2005. Moreover, a small proportion of households already have a relatively high debt service burden. For those, some of whom will be on variable rates, any rate rise will be a struggle, even though the impact on the wider economy and most households are likely to be modest,” said Robert Gardner, Nationwide’s chief economist.

That said, while a rise in interest rates may come to a shock to anyone who bought their first home in the past decade, higher mortgage interest will have been factored into lenders’ calculations since new rules were introduced in 2014 to curtail high-risk lending, so don’t panic.

Should I fix my mortgage now?

People on a variable rate mortgage benefit from interest rate changes when the base rate drops. However, mortgage experts agree that today’s announcement heralds a general upwards trend in interest rates.

MarkCarneyinterestratesmortgage.jpg
Mark Carney, governer of the Bank of England, announced the Bank rate rise to 0.75 per cent today (Bloomberg)

This means that borrowers on a variable rate should seek out a new deal now if they can.

“If November’s rate rise was important for its symbolism, today’s rate rise is equally important for its message to the market: the record low interest rate era is over, and interest rates are now headed in one direction,” said Craig McKinlay, sales and marketing director at Kensington Mortgages.

“This rise should be a call to action for those borrowers who haven’t yet remortgaged to get in touch with a mortgage broker and seek a new competitive deal.”

Will house prices go up or down now interest rates have risen?

The 0.25 per cent rate rise may push down already falling London house prices, as the cost of home ownership looks set to rise further.

“It’s not the relatively modest increase in interest rates which is significant – the message it sends about their future direction is far more important,” said London estate agent and former residential chairman of the Royal Institution of Chartered Surveyors, Jeremy Leaf.

“The change is likely to compromise already fragile confidence to take on debt in the property market and wider economy.”

London house prices fell for the fourth month running in May to £479,000, a drop of £2,000 off the value of the average home in the capital.

Prices were expected to continue to decline slightly for the next couple of years due to uncertainty over Brexit, combined with the likelihood of further interest rate rises.

“In our regional forecasts we predict price falls in London in 2018 and 2019 of 1.7 per cent and 0.2 per cent respectively,” said Richard Snook, senior economist at consultants PwC.


UK interest rates: Pound sterling drops sharply after Bank of England hike

The pound was trading down 0.82 per cent against the dollar after the Bank of England’s monetary policy committee voted unanimously to hike the base rate from 0.5 per cent to 0.75 per cent.

Sterling had been trading down around 0.4 per cent earlier in the session and appeared to reverse those losses in the immediate aftermath of the decision. However, the currency took another dip and fell to $1.3020 an hour after the Bank announced its decision.

The pound also dropped against the euro, tumbling by 0.34 per cent to €1.122.

Sterling’s decline coincided with the Bank’s press conference, during which governor Mark Carney said Threadneedle Street would continue to follow a strategy of “ongoing, limited and gradual tightening of monetary policy” in order to keep inflation within target. He added that this could lead to three further rate rises over the next three years.

“Despite the intentionally hawkish signals it appears that traders aren’t buying it, with a failure for sterling to gain on what is, on the face of it at least, a positive hawkish message, a potentially ominous warning sign for the currency going forward,” said David Cheetham, chief market analyst, at brokerage XTB.

“Looking ahead, the curve has barely budged on today’s news with a further hike before year-end still seen as highly unlikely and an additional increase not priced in until September 2019.”

Jordan Hiscott, Chief Trader at ayondo markets, said it was notable that sterling had fallen “despite the fact the market had priced in the expectation of a 0.25 per cent rate hike”.

“A couple of things stand out for me. Firstly, the recent economic data is not consistent enough to warrant a rate increase and future near-term increases. Brexit and the fractious nature of negotiations will likely also affect this

“Secondly, the last time the MPC voted unanimously to increase rates was May 2007, and that didn’t turn out too well then.”

Business groups were critical of the central bank’s decision to hike, with the IoD’s senior economist, Tej Parikh, saying: “The rise threatens to dampen consumer and business confidence at an already fragile time.”