As Britain begins its preparations to leave the European Union the only certainty ahead is uncertainty. We explain what it might mean for you and how you can try to protect your finances
After 52% of voters opted to leave the European Union (EU) on 23 June 2016, Britain looks set to exit the organisation, in what has become called ‘Brexit’.
What does this mean for your money and how can you reduce the impact on your finances?
- Get the best exchange rates for a weaker pound
- What can you do with your mortgage?
- How can you manage your credit cards?
- What can you do with your savings?
- What could happen to consumer protections?
- Clean up your credit report
Get the best exchange rates for a weak pound
The value of the pound fell immediately after the vote against many currencies. Falling to levels not seen since the 1980s against the dollar, and two year lows against the euro.
When the pound is weak, your money will not go as far when you go on holiday abroad, so it’s even more important to make sure you’re going to get the best exchange rate possible.
Get the best exchange rates with a credit card
One way to get the best rates would be to get a credit card that doesn’t charge fees for spending overseas, meaning you will enjoy near ‘perfect’ (sometimes even better) market exchange rates on purchases made with the credit card.
However, note you will only enjoy these exchange rates on card purchases, not on any money you withdraw with the card. If you do so you will likely be charged both a foreign ATM fee and a cash advance fee.
What if you want cash to take overseas?
If you do want to get best rates for your cash, it’s sensible to shop around online with currency brokers, or compare prepaid-travel cards, to find the most competitive price for your pounds.
Typically, you will find better prices online than you would get from bureaux de change, in particular compared to rates available at airports, but foreign exchange is a highly competitive industry so this isn’t always the case.
In either case make sure you shop around before you go away to make sure you get the best rates.
What can you do with your mortgage?
With uncertain times ahead it could be a good idea to fix your mortgage rate. This will keep one of your largest monthly outgoings at a set amount for a few years.
It’s also worth noting that recently the cheapest fixed rate mortgage deals have become as cheap as the market-leading variable rate mortgages..
Think about your personal circumstances
You should always approach your mortgage with a personalised plan and try to ignore the markets, or you could find yourself obsessing over getting the perfect rate.
Think about your circumstances, your budget for outgoings and prospects for income, before deciding on what mortgage best works for you.
Also note that when looking for a mortgage deal, you shouldn’t always necessarily go for the cheapest interest rate, as sometimes the amount you pay in fees will mean your mortgage costs could end up being higher in the long run.
What could happen to interest rates?
The Bank of England (BoE) has cut the base rate of interest to 0.25% down from the already historic low of 0.5% where it has sat since 2009.
The base rate of interest is the ‘price’ of money that retail and merchant banks can buy money for, it is one of the most important factors that determines the interest rates available to the public.
Typically, if the base rate falls, mortgage and loan rates will also fall, however savings rates are also likely to fall. Watch the Bank of England’s video series if you’d like to know more about their role.
In their last quarterly report before the vote the BoE stated they would “face a trade-off between stabilising inflation on the one hand and output and employment on the other” in the event of a Brexit vote.
By this they mean:
- If there is inflation (prices going up), the bank will be under pressure to raise interest rates
- If there is falling output and employment the BoE may decide to cut rates to stimulate growth in the UK economy
Beyond cutting rates to 0.25% in August 2016, at the time of writing there have been no mention of further measures, but Governor Mark Carney has hinted he may cut rates further if the need arises.
Will it be harder to borrow?
It is impossible to know whether it will become more difficult to borrow as a consequence of Brexit, it depends on what happens with the wider economy.
During the credit crunch it did become difficult to borrow money, but that was precipitated by the financial crash of 2008, where widespread ‘irresponsible’ lending lead to a crisis of confidence amongst lenders.
The Mortgage Market Review, which came into effect in 2014 implemented stricter lending criteria and remains in force.
The BoE did state prior to the referendum that we may see a reduction in investment into the UK economy as a consequence of Brexit, leading to falling output and rising unemployment.
But, following the vote Governor Mark Carney announced the BoE has strong reserves of foreign currency and sterling, and will do what is necessary to keep liquidity (available cash and credit) in the UK financial markets.
He also highlighted the rules had been tightened over the cash reserves commercial banks need to keep, meaning they are better placed to face any form of economic downturn than they were in 2008.
Watch the video below of Governor Mark Carney’s statement after the referendum results.
How can you manage your credit cards?
There has not yet been any mention of notable changes to the credit card market, nor any talk of removing consumer protections currently in place.
The EU did implement legislation in 2015 that made credit card companies pay the processing charges of credit card transactions instead of retailers. Many card companies gave this as the reason for cutting back on cashback and other rewards available to cardholders.
However, there has been no mention of reversing this and it’s unlikely to be a priority for the politicians at the moment.
As a rule, if you’re not certain about your future income you should avoid getting into any form of unsecured debt you can’t easily afford to repay, such as irresponsible spending with a credit card.
Use 0% interest cards to clear debts
If you are concerned about any unsecured debt you already have on credit cards, you could consider moving it to a 0% balance transfer credit card. This could give you some breathing space as you repay your card debts without paying any interest for as long as 40 months.
If you’d like to know more about how 0% balance transfer cards work, watch our video guide.
What can you do with your savings?
While there may be the prospect of inflation in post Brexit Britain (with money becoming worth relatively less than before), keeping your wealth as money in a current or savings account remains a low risk investment choice.
The Financial Services Compensation Scheme (FSCS) is staying in place, and will likely do so as this is a UK government initiative. However the deposit guarantee compensation limits are currently in line with EU (and European Economic Area) rules.
The scheme was created during the last recession and guarantees deposits up to £75,000 (£150,000 for a joint account) should your bank go bust.
While your money will be safe, the downside of savings accounts and ISAs is that many have been offering low rates of 1-2% AER (Annual Equivalent Rate – the rate of interest you are paid on deposits) for several years now.
This is mostly due to the BoE keeping the base rate of interest at 0.5% for so long, and if they do cut interest rates, savings rates could fall further.
High interest current accounts
Several high interest current accounts are still advertising relatively generous interest rates as high as 5% AER. However, these accounts tend to come with a number of terms and conditions you’ll need to fulfill in order to enjoy the high interest rates.
It’s also worth remembering that from April 2016 you no longer have to pay tax on the first £1,000 you earn in interest each year as a basic rate taxpayer, or the first £500 as a higher rate taxpayer.
If you think your current account isn’t up to the scratch, you can switch to a new bank within seven working days with the current account switch guarantee.
What could happen to consumer protections?
There has been no mention of what will happen to the numerous EU-wide consumer protections that are in place. Until further notice these are likely remain in effect. And are unlikely to change while the UK negotiates its exit from the EU.
The Financial Conduct Authority (FCA) announced after the vote it will keep all the regulations that come from the EU in place for now (such as the recent Credit Directive that created consumer buy to let mortgages).
The FCA stated:
“Consumers’ rights and protections, including any derived from EU legislation, are unaffected by the result of the referendum and will remain unchanged unless and until the Government changes the applicable legislation.”
Claiming refunds from airlines
Your consumer rights for flights are protected by European Commission law (Regulation (EC) 261/2004) and applies to all European airlines flying within the EU. There has been no mention of excepting Britain from this regulation.
Under the current rules if your flight is delayed, your airline is required to provide you with meals and refreshments to match the length of the delay (the delay must be over three hours to qualify). You are entitled to assistance and possibly compensation between €125 and €600.
If you are delayed by more than five hours and decide not to travel, you are entitled to a refund paid by the airline within seven days.
However, if there were ‘extraordinary circumstances’ which delayed your flight the airline may not have to pay compensation.
Claiming refunds through your credit card
If you have purchased a good or service on credit and you did not receive the goods advertised, you could still get a refund from your credit card provider under Section 75 of the Consumer Credit Act.
Section 75 is a legislation that means your credit card provider and the trader you made the purchase from are equally liable if something goes wrong with a purchase you made on your credit card.
Clean up your credit report
The UK government’s credit score has suffered as a result of Brexit, but your personal credit score shouldn’t be affected.
Even so, if there are uncertain times ahead it’s good idea to make sure your finances are in good shape, and a good place to start is with your credit report.
Your credit report and score is like your financial CV, banks will use it to decide if you can get their best mortgage, overdraft, loan and credit card deals.
You can access your credit file through a number of credit agencies and check your credit score and any information that is recorded about you, it’s well worth checking this is correct).
There are a number of other factors that will influence your credit rating:
- Whether you are registered to vote
- Whether you have any credit cards you’re not using
- If you’ve made a high number of credit applications in a short space of time
- If you are registered on the electoral roll
- If you move house frequently
- If you have existing joint accounts open
- Substantial fluctuations in your income
If you are concerned about your credit score it’s worth checking these details are correct on your credit report.
If you’d like to build or improve your credit score you should make sure your name is on a few household bills, get on the electoral register, and you could also consider responsibly using a credit-building credit card to create a history of borrowing and repaying money.
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