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Update 11/12/18: Why the UK should stay part of the EU
The ‘B’ word has been all over the media in the last month. The Prime Minister Theresa May officially triggered Article 50 on 29th March, starting the process of removing the UK from Europe. Wherever you stand on the issue, there’s no doubt that this is the start of a period of significant change for the UK. Brexit is likely to affect many different areas of our lives, from the prices we pay, to the way that we travel. Perhaps the most significant impact of Brexit will be the way that it affects UK personal finance, the way we borrow, save and spend.
The most important factor in terms of the impact of Brexit on personal loans (more at solution-loans.co.uk/personal-loans/) is interest rates. At the moment interest rates are low – the Bank of England Base Rate is 0.25%. This is a record low for the UK and has meant that borrowing is (comparative to pre-2008) cheap. Many lenders – especially mortgage lenders – set their interest rates using the Bank of England Base Rate as a guide. This has meant that it has been cheaper to borrow than in many previous years. However, in February 2017 Mark Carney, Governor of the Bank of England, indicated that interest rates would not be likely to stay at this level. He said that the likelihood was that a raise was on the horizon in the relatively near future.
The fear for borrowers is that an interest rate rise could push up the % payable to borrow the same amount of money. Although this likely will happen for mortgages, it’s worth remembering that personal loan interest rates are not as tightly linked to the Bank of England Base Rate as mortgages are. So, lenders may not pass on a rate rise to the same extent. There are also other factors to bear in mind when it comes to personal loan interest rates, such as the individual’s credit rating.
The flip side of the interest rates coin is savings. If interest rates rise then borrowing costs more but saving should earn more. Interest rates on savings are currently incredibly low – the top standard easy access deal is 1.27%. Most experts don’t believe that UK savings rates could actually get much lower. However, whether they will rise – and, if so by how much – is another question that depends on what the Bank of England does with interest rates. So far, cash ISAs have definitely not benefitted – in May 2016 (pre-referendum) the average cash Isa rate stood at 0.87% but is now halved at 0.43%.
Since the Brexit referendum result last year the pound has lost a lot of ground against other currencies. It’s now worth much less i.e. you will get fewer dollars or Euros for your pound that you might have two years ago. Private pensions invested in stocks and shares will have lost money as a result of this currency value fall. So, if you’re cashing in your pension today – or in the near future – you may well see a drop in its value. If not, then this is a ‘paper loss’ that could be set right in future if the pound picks up its strength again.
The state pension has been another cause for concern for many. Some predicted that a huge economic downturn following Brexit would mean that the state pension rate would have to be cut to cover the cost. For now, it remains the same. However, what happens in future will depend on how the UK economy responds to the moment we actually leave.
So far, Brexit seems to have slowed the housing market – fewer people are moving home. According to figures from HM Revenue & Customs, transaction values from the second half of 2016 were 9% less than the year before. London has been the most significantly hit and experts predict that this will continue. Prices in the capital are set to ‘flatline’ for the next couple of years, as people are cautious about making such a large financial investment.
Inflation is the biggest problem for all of us when it comes to living costs. As a result of the drop in the value of the pound some things already cost more. The latest BRC-Nielsen Shop Price Index showed that food prices have risen at the fastest rate for three years as retailers passed on their Brexit-related costs to shoppers. The key problem is imported goods, which now cost more to bring into the country as a result of the weak pound. However, some retailers are increasing prices across the board, spotting an opportunity to do so via Brexit whether it is justified or not.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read about Alex Hartley
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