Brexit Q&A: How a Leave or Remain vote could affect your personal finances

From exchange rates and state pensions, to property purchases and tracker mortgages

Wednesday 15 June 2016 15:49
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You need to weigh up the financial risks of a vote for Brexit or Remain
You need to weigh up the financial risks of a vote for Brexit or Remain

We’ve been inundated by questions about how a vote to leave or remain would affect your personal financial circumstances. Here are a representative sample of the issues that matter most when it comes to your money, and the all-important responses from experts within impartial organisations...

I need to pay for something, in euros, by the end of July. Should I do so now - even though the exchange rate is rubbish - because it will likely get even worse if we vote to leave? Or should I wait until after the referendum, because if we vote to stay the pound will likely bounce back?

A Marklew, Wendover, Bucks, UK

Mark Bodega, director at currency dealer HiFX.com says: “The Brexit debate has already played a significant role in undermining the value of the pound. At the end of December last year, £1 was worth €1.42 – today it’s only worth €1.26. Similarly, while £1 was worth $1.56 last September, it’s since fallen to $1.42 today. The lower exchange rates mean your money gets you less. For example, if you’d changed £500 into euros at the end of last year, you’d have received €710 – today you’ll get only €630 to spend on holiday; similarly, your £500 used to buy $780, but now it gets you just $710.

You need to need to weigh up the risks. In the event that voters opt for Brexit, there may be further significant declines with many warning that a Leave vote would be likely to trigger a 15 to 20 per cent fall in the value of the pound.

On the flip side of this, if the UK votes to stay, the pound may recover some or all of the losses it has made in recent months as, Brexit aside, the outlook for sterling is relatively strong, particularly against the euro. For example, the Bank of England is almost universally expected to raise interest rates in the UK before the European Central Bank does so in the single currency zone. In other words, there’s a risk to buying in advance of the referendum - if, within days of a Remain vote, the pound bounces back you could be regretting having missed out on the rising value of the pound.

That said, the potential downside of not buying ahead of the referendum is likely to be greater than the risk of doing so as a Remain win would be unlikely to trigger a rise in the pound as large as the potential 15 to 20 per cent fall that could occur if Vote Leave wins.

I live in mainland Europe and pay into the state’s pension system. What happens to me if I move back to the UK and retire there? Is my euro pension transferrable?

P.Cantor, Madrid, Spain

Kate Smith, head of pensions at Aegon says: “British citizens living in mainland Europe and paying into a state pension will need to claim the state pension in the country they lived in. Although it’s highly unlikely you’ll be able to ‘transfer’ the value of your state pension to the UK, you may be able to arrange for regular pension payments to be made into a British bank account. I suggest you contact the Government agency in the European country you currently live in. Alternatively, you could speak to the UK Government’s International Pension Centre by ringing 0191 218 7777 or filling in an online application form at www.gov.uk/international-pension-centre.

“It’s possible you might be entitled to the UK State Pension, which is based on your UK national insurance record. You need at least 10 qualifying years to get any state pension, and 35 years to get the full amount of currently £155.65 a week. As you’ve lived in the European Economic Area (EEC) you may be able to use your years living outside the UK to gain entitlement to the UK State pension.

“It’s worthwhile checking your UK national insurance record, you can do this by contacting HMRC online and getting an online State pension statement www.gov.uk/check-state-pension.”

I have a tracker mortgage. How much trouble am I in if the UK leaves the EU? Is there anything I can do about it?

C. Conway, London, UK

Dr. Jack Meaning, Research Fellow at the National Institute of Economic and Social Research, says: “There are two elements that determine the interest rate on your mortgage. The first is the path for interest rates set out by the Bank of England. The second is the additional amount added by banks to cover them for the risks associated with lending you the money.

“For those already on a fixed-term tracker mortgage, what matters in the near-term is the first element. Should the vote be for ‘remain’ on 23 June then you can expect that rates will continue to increase over the next few years, but very slowly, staying well below historic averages. However, should the vote be to leave, the Bank of England will likely be faced with rising inflation, and a slowing economy. If they are concerned more about the former, then rates will rise faster and you will be worse off. If the latter then rates will rise slower or may even fall. This will make you better off in terms of your mortgage cost, but you should remember, rates would only be going down because the performance of the economy is worse, so you are likely to be losing elsewhere.

“I think the most likely scenario is that the Bank of England will keep rates broadly where they are. After all, there is not much room for the Base Rate to go much lower than it already is.

“However, at some point you’re fixed-term will come to an end, and this is where the second element that influences mortgage rates comes in to play. Risk is likely to be higher and therefore so will be the additional cost that banks charge above Base Rate, pushing up mortgage rates, especially if that post-Brexit risk is centred on the housing market. The same argument holds for people trying to get their first mortgage.

“In the near-term it may be that you are not in as much trouble as you think, but it is likely to catch up with you eventually.”

"I'm looking at buying a property after renting post divorce. Do I buy now? If Brexit happens what can I expect? If ‘remain’ happens what can I expect?"

A. Milburn, Liverpool, UK

Jonathan Harris, director of mortgage broker Anderson Harris, said: 'There is lots of speculation surrounding Brexit and what it means for house prices but the reality is nobody knows. People have delayed making decisions regarding moving until the outcome is known unless they are needs-based buyers who simply have to get on and move.

“Much depends on your situation and how urgently you wish to buy - if you have concerns regarding the outcome of the vote, then it might make sense to rent a while longer while you wait and see. Once the outcome is known there will at least be some certainty either way although if the UK votes to exit there could be further upheaval as it won't happen overnight.'

I have two rental properties - one in London, one in Manchester. There have been lots of large businesses saying that they would have to relocate staff away from the major centres here to European cities. How could that affect housing and rental prices - nationwide, not just in London - and how quickly might it take effect?

P.Taylor, Battersea, London

Jeremy Leaf, a former RICS chairman and north London estate agent, says: “Talk of what will or won’t happen to house prices after the referendum is speculative. If we remain in the EU, we would expect property prices to be much the same or to pick up a little as uncertainty will be removed. This would be fairly immediate as remaining will be a fairly seamless process.

“If the UK exits the EU, prices could drop a little as there is a reduction in activity but any figures are purely speculative and likely to be short lived because the housing market has shown to be relatively resilient during all of this uncertainty.

“It is transactions that are more the problem and uncertainty on the jobs market that could be an issue as whether you have a job or not will form your opinion on taking on debt. If your job status changes, it will compromise your ability to repay your mortgage, for example, and obviously if many workers are relocated outside of the UK, there will be less demand for rental property.”

Will the UK credit rating be devalued again if we leave the EU?

G.Johnstone, Sutherland, UK

George Efstathopoulos, Co-Portfolio Manager at Fidelity Solutions, says: “Should there be a Brexit, the financial and economic implications could be compounded by the continuing slowdown in China and the relatively mature expansion of the US economy. The UK’s twin deficit (current account and government spending) may force rating agencies to rethink their UK rating and we could see a downgrade, at least from one of the rating agencies.

“When Standard and Poor’s downgraded the credit rating for the US government in 2011, cutting it from AAA (outstanding) to AA+ (excellent), US government debt was not negatively affected but instead posted strong returns. However, US government debt and the US dollar were and are still seen as the world’s main safe haven asset class. UK government debt would not necessarily experience similar dynamics.

“UK government debt might be resilient in the short term, as investors seek out safe haven investments. Yields could therefore move even lower, particularly with UK government debt looking relatively attractive compared to ten year German government debt, where yields moved into negative territory on Tuesday. UK government debt could also find support from the Bank of England which would potentially cut rates to stimulate the economy. However, I think a twin deficit, falling Sterling and outflows from foreign investors would counterbalance these positive dynamics, with UK government debt under pressure in the medium term – especially if we start seeing signs of recession.

“In this context (and indeed more generally), it is important to remain diversified across asset classes. Spreading your sources of risk helps to cushion the impact from any one shock and having multiple sources of return helps to build the resilience of your returns – particularly important if you’re investing for an income.

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