On 23 June 2016 the UK’s electorate took the decision to leave the EU. This decision has left many people wondering how it will affect their finances in future years.
Whilst it is impossible to give a definite answer there are certain things that are already becoming clearer, despite the overall picture remaining very uncertain at this point.
An immediate effect of the decision to Brexit was a decline in the pound, which fell at one stage down 10 per cent to its lowest level since 1985. What followed was an initial drop in the markets, which have remained shaky ever since.
The immediate knock-on effect to this is that buying goods or services from other countries will become more expensive, which leads to higher inflation. If this trend continues then the following is likely to happen to personal finances:
Mortgages – Ahead of the referendum, the Treasury predicted a rise of around 0.7 per cent and 1.1 per cent in borrowing costs following a vote to leave, which David Cameron equated to a rise of up to £1,500 to the average mortgage bill.
It is too early to tell if that will be the case, but there are a number of potential outcomes of which borrowers need to be aware. Firstly, the Bank of England may cut interest rates in an attempt to shore up sterling, which is likely to push the price of lending down.
Alternatively, Britain may undergo a period of high inflation, which will force the Bank of England to increase rates, which in turn will force mortgage lenders to increase their rates.
As for those applying for a mortgage they may find that as banks are less willing to take on risk they make the criteria and affordability tests for those borrowing much tougher.
House prices – The International Monetary Fund (IMF) has said that Brexit may cause house prices in the UK to fall significantly, a point which is backed up by the Treasury which has suggested that house prices could be hit by between 10 per cent and 18 per cent over the next two years, compared to where they otherwise would have been.
This might be good for first time buyers as home owners sell early to get the biggest return on their home, which may lead to increased supply in the property market. However, it is important to note that this could trigger the opposite effect as home owners hold on to their home over fears that they may not be able to afford another.
However, if the Bank of England were forced to cut rates, all these projections would be wrong.
Pensions – If the economy worsens in the coming months and years and the Bank of England decides on a further programme of quantitative easing (QE) by cutting rates the UK may experience lower bond yields and with them annuity rates. As a result anyone taking out a pension annuity could get less income for their money. This is just one of a number of outcomes, but much could change.
Prior to the referendum, the prime minister also suggested the “triple lock” for state pensions may be threatened by a UK exit. However, since he has announced his resignation it may be some time before this is considered – if it is considered at all.
Investments and savings – Any rise in interest rates would be good for savers. However, those trading in British assets and stocks may find less interest from the international investors.
In reality it is impossible to tell which way the markets will go. The first week after the UK’s decision to leave the Union showed just how fickle the markets are to the smallest of changes.
So you may be asking, what is clear following Brexit? Well the answer is very little, but investors and savers can restore some certainty to their finances by choosing a financial adviser who understands their situation and acts in a proactive manner on their behalf.