This morning, the news broke that the UK has voted to leave the European Union.
With 51.9% of the vote, the British public has decided that the UK is stronger alone. But how will the Brexit affect our household finances?
There is just one other country that has ever left the EU (or the European Economic Community as it was in 1985) – Greenland.
And while the residents of Greenland appear to have benefitted from leaving, can the UK expect to net similar gains, or are our finances destined for trouble?
The most important tool in forecasting the future of our finances is the value of the pound. Most economists expect the value of sterling to drop significantly in the medium term. This morning, it has certainly fallen sharply – at one point down by 10% to its lowest level since 1985.
This is likely to mean:
- Buying goods or services from other countries will become more expensive.
- As a result, inflation will be higher.
- Goods being sold to other countries will become cheaper for buyers.
To combat the extra pressure on inflation, the Bank of England may decide to raise interest rates, making mortgages and loans more expensive to repay. The Treasury has forecast a rise of between 0.7-1.1% in borrowing costs, with David Cameron claiming that the average cost of a mortgage could increase by up to £1,000 per year now that we’ve left the EU.
Since this would mean that costs for landlords would rise, rent prices are also likely to go up. This could create problems for tenants, who are already struggling with housing costs.
If you are a landlord, now could not be a better time to protect your rental income. Our Rent Guarantee Insurance policy will cover you for up to £50,000 in lost rent – can you afford to lose out on this?
Equally, however, if there were a severe shock to the UK economy, the Bank of England may consider a cut in rates. In this case, the cost of lending would actually come down.
Read the Bank of England’s response to the result here: https://landlordnews.co.uk/bank-england-releases-statement-following-eu-referendum-result/
If the cost of mortgages increases, then house prices could drop significantly, as predicted by property portal Zoopla.
The Treasury believes that house prices could fall by between 10-18% over the next two years, compared to where they would have been otherwise. This would be good news for prospective first time buyers, but not so good for existing homeowners.
The National Association of Estate Agents (NAEA) claims that property prices in London could see the biggest drop, by £7,500 over the next three years. Elsewhere, it expects prices to fall by £2,300 compared to where they would have been if we had stayed in the EU. However, it still expects prices to rise, just at a slower rate of growth.
The full statement from the NAEA and the Association of Residential Letting Agents is here: https://landlordnews.co.uk/brexit-mean-housing-market/
Again, if the Bank of England is forced to cut rates, all of these projections would be wrong.
A week before the referendum, Chancellor George Osborne warned that a Brexit could result in tax increases. He spoke of a 2p rise on the basic tax rate – currently 20p in the pound – and a 3p increase in the higher rate – currently 40p. He also claimed that Inheritance Tax might rise by 5p from its current 40p.
Investments and savings
Any rise in interest rates would be welcome news for savers. However, during the campaign, the Treasury argued that UK shares would become less attractive to foreign investors if we leave the EU, and would therefore decrease in value.
However, this is by no means a certainty in the long-term. Shares typically rise with company profits. If big exporters benefit from a weaker pound, the value of their shares could rise, while importers would see their profits squeezed.
Leading investment platform Hargreaves Lansdown says that it is impossible to know the long-term economic implications of the Brexit.