As Mrs May has already assured us several times, Brexit means Brexit. But with Article 50 finally announced and Brexit on its way, it’s time to ask exactly what it might mean for your personal finances.
We take look at the future of the pound, investments, savings and mortgages.
The Brexit referendum in June last year was widely expected to have an immediate negative effect. The Bank of England cut interest rates in half to protect the economy – but events did not unfold as predicted.
The UK stock market has boomed, with both the FTSE100 and FTSE250 showing record highs. The UK economy has grown stronger than most developed economies since last summer’s referendum.
If nothing else, the failure of the economy to conform to the pessimists’ expectations suggests that we are in uncharted economic waters. With Article 50 now triggered and the negotiations now beginning, the effects of the next stage of Brexit may be just as difficult to predict.
Outlook for the pound
The performance of the pound has demonstrated just how predictions can be flawed. It is true that it weakened sharply. But a falling pound has made UK exports much more attractive to the rest of the world.
Prior to the referendum, it had risen to a level that many experts believe was unsustainable. Even without the Brexit vote, a correction might have been expected.
Sterling is currently 17% down against the dollar compared to its pre-referendum level. Current UK interest rates restrict its appeal relative to other currencies, especially the dollar, as the US has already begun increasing its own central rate. A low value pound could therefore continue, with UK exports and the FTSE showing the benefits.
Of course, with the growth of the UK economy continuing, the UK interest rate could also be ready for an increase. Most consider this will not happen until next year. Even if there is strong economic growth the Bank of England could leave rates alone if Brexit anxiety becomes a real concern.
How will the stock market respond?
Some experts were predicting markets would collapse along with the pound. Britain’s economy defied expectations and bounced from the initial shock with a speed and extent that caught many investors unaware.
Most analysts now expect the triggering of Article 50 will have little immediate influence on markets. However, the specifics of the Brexit deal itself are crucial – markets could suffer if negotiations prove difficult, although prospects for global growth look positive, with the low pound helping UK businesses take advantage of it.
If growth and interest rates do pick up, banks and financial stocks may benefit. They have struggled since the financial crisis, as rock bottom interest rates left them with limited margins which will expand when rates go up. Luxury goods may also benefit with a stronger economy.
How safe will your savings be?
Savings rates plunged to record lows in the wake of the Brexit vote, helped on their way by the Bank Rate decision in August 2016. Again, the triggering of Article 50 is unlikely to make much difference. Savings rates may already be on the way back up, although even the best performers are still struggling to beat inflation.
Once negotiations begin, financial markets can be expected to react. Savings rates do not move as rapidly as stock markets, so they are unlikely to respond until concrete facts emerge about the eventual deal. Other factors, such as the success or otherwise of the American economy under President Trump may have a more significant effect.
The Brexit effect on mortgage rates
Many predicted mortgage rates would rise after the referendum result. In fact they fell, partly because of the Bank Rate cut in August, and partly because of increased competition in the mortgage market, as lenders chased a smaller pool of borrowers.
Mortgage rates may now be creeping up. Wholesale “swap” rates – the rate at which mortgage lenders secure capital for fixed-rate loans – fluctuate according to market pressures, irrespective of Bank Rate. They have been rising since August.
This could indicate that fixed mortgage rates are ready for an increase. Low fixed rates are still available, but if the market is beginning to turn it may be time to secure a cheap fixed-rate mortgage while you can.
The main change will come if and when the Bank of England puts up the bank rate.
What should you do?
Planning the future of your finances is never easy, and the slow but ongoing global recovery combined with the unknown from Brexit makes any prophecy doubly suspect.
Preparing for uncertainty may be the only solution. Maintaining a diverse investment portfolio, looking at ways to make the most from cash savings and fixing your mortgage while rates remain low are all sound ideas.
To discuss any aspect of your financial plan in the light of Brexit, please give the Continuum team a call.
Please note cash deposits are covered by the Financial Services Compensation Scheme (FSCS), up to £85,000 for deposit savings and £50,000 for investments. However investments do carry a degree of risk and the value of your investments can go down as well as up and you may not get back the amount invested.
Levels and basis of reliefs from taxation are subject to change
Your home may be at risk if you do not keep up with the repayments for a loan or mortgage secured on your property.