The FTSE 100 had its best week for eight years but the pound has plunged. The Bank of England has hinted that interest rates could be cut after seven years at a record low of 0.5%, possibly in just 11 days’ time. Some economists say Bank rate could sink to 0%.
In this chaotic post-referendum world, there are many questions but few concrete answers about the impact of the Brexit vote on our personal finances. Today, Money responds to readers’ queries.
Remortgage dilemma: professional couple on a lifetime tracker
Giles Rowlinson, 31, and his wife, Charlotte, 28, who works in publishing, switched to a lifetime tracker mortgage with HSBC earlier this year. It is set at 1.99 percentage points above Bank rate, which means they currently pay 2.49%. Importantly, the deal allows the couple, from Chiswick, west London, to switch to another lender without penalty.
Giles, who works in finance, said: “If Bank rate falls then our monthly payments will also drop. However, if we can get a long-term fix at a lower rate, should we go for that instead? We deliberately went for a deal without an early repayment charge, so we have that option available to us.”
Mark Carney, the governor of the Bank of England, hinted last week that interest rates could fall — possibly after the monetary policy committee meets on July 14, or next month. The Rowlinsons need to work out what to do with their loan. Anyone coming to the end of a mortgage deal, buying their first home or on a tracker mortgage has the same dilemma.
Ray Boulger of the mortgage broker John Charcol said borrowers have a “once-in-a-lifetime opportunity” to lock in to a low-cost fixed deal, but there is no need to rush. “I would wait to see what happens in the next month or so,” he said.
“The key point is that while those on a tracker deal will see payments fall if Bank rate drops, the likelihood is fixed-rate deals will become even more competitive.
“For example, you can already get a very competitive five-year fix from HSBC at 1.99%. Even if Bank rate fell to 0%, the Rowlinsons would not pay less than this on their tracker deal [their rate would fall to 1.99%]. The five-year fix requires a £1,499 fee and a 35% deposit.”
Boulger added: “They may want to consider paying a little more for a 10-year fix instead. While they would lose the flexibility of the tracker, they would gain the security of a longer-term fix.”
The cheapest 10-year fix is 2.84% from Leeds building society. It has a £1,499 fee and requires a 35% deposit. Five years ago there were just eight 10-year fixes, with an average rate of 5.43%. Today there are 130 at an average of 3.84%, according to the financial information firm Moneyfacts.
Weakening pound: British couple who retired in France
Tim Cockroft, 59, and his wife, Sarah, 60, moved to a village near Mâcon in eastern France three years ago. Their main sources of income are Sarah’s pension and their savings accounts in the UK.
All their income is paid in sterling and transferred to a euro account in France, so they keep a close eye on the exchange rate.
The value of sterling dropped from about €1.30 just before the referendum to a low of €1.19 on Friday. This meant £1,000 would buy £1,190 rather than £1,300.
If you are worried about currency fluctuations you can use a “forward contract” to lock in an exchange rate for monthly income payments. Currency brokers, such as HiFX and Moneycorp, allow customers to fix a rate for a maximum of two years.
Last August, the Cockcrofts locked in an exchange rate of €1.37 for a year. In February, just hours after Boris Johnson announced his support for the “leave” campaign, they added an extra six months to the contract at a rate of €1.22.
Just before the referendum result was revealed they had the chance to extend for another six months but chose not to. Tim said: “Like many other people, we assumed the result would go the other way and the pound would strengthen.”
It is also possible to use a forward contract to lock in rates for a one-off payment, such as if you plan to buy a property on the Continent or need to send over a large sum of money to pay for building work. You will be required to pay a 10% deposit and then the balance when the money is needed. If the exchange rate moves during that time, you will not be affected.
Do not be afraid to negotiate. The rate you get depends on the amount of money you want to exchange and the duration of the contract.
Savings: young couple with a child
While those with a mortgage may be celebrating, long-suffering cash savers will have been horrified by Carney’s indication that interest rates could fall even lower.
Karen Petty, 33, asks if there are any decent savings accounts left. The teacher moved from London to Chelmsford, Essex, last year with her husband, Mark, 32, and 22-month-old son Ethan. She said: “We’re trying to build up our savings for home improvements and a rainy-day fund.”
Experts said that savers should act quickly because the best deals could disappear fast. Andrew Hagger at the financial website moneycomms.co.uk said: “Savers have had a tough time since the financial crash but the Brexit-induced uncertainties are likely to mean lower returns and more misery. If you’re looking to switch your savings, I’d act sooner rather than later. Rates are pretty poor as it is but I think they will deteriorate in the short term.”
Susan Hannums at the adviser savings–champion.co.uk suggests savers “hedge their bets between fixed and variable accounts”.
Charter Savings bank has the top fixed-rate deal: 1.79% for those willing to tie their money up for one year, or 1.91% for two years. RCI has the best buy for three-year accounts, at 2.15%.
The top instant-access variable-rate deal, at 1.45%, is also offered by the French bank RCI. It is covered by the French compensation scheme, which protects up to €100,000 (about £83,750 at the current exchange rate) if the bank collapses.
Savings in British-registered banks and building societies are guaranteed up to £75,000. This level is set by an EU directive, so it is not clear where it will stand in future. For now, though, it will stay at £75,000, so there is no need to panic.
These savings rates beat the top cash Isa deals (see our Best Buy tables, page 5). Many people now enjoy tax-free returns on all their savings — not just their Isas — thanks to the new personal savings allowance. The allowance is set at £1,000 a year for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers do not receive the allowance.
Do not forget current accounts: some have attractive interest rates and are also covered by the personal savings allowance. TSB and Nationwide, for example, offer 5% on balances up to £2,000 and £2,500 respectively.
House prices: the buy-to-let investor
Tara Powell recently put down £2,000 deposits on two new studio flats in Slough, Berkshire. She is buying the properties, due for completion in two years, for her daughters as buy-to-let investments.
“The builder did say that in the event of Brexit I could pull out and it would return my £4,000,” said Powell, 72. “I’m not sure what to do: pull out or carry on hoping they will prove to be a good investment in the long run.” The retired teacher contacted her solicitor after the Brexit result to discuss pulling out and must decide by Friday.
Experts expect house prices to rise more slowly than if voters had backed “remain”. The Centre for Economics and Business Research (CEBR) has cut its growth forecast for 2016 from 4.9% to 4.5%. The online property portal Zoopla thinks the average UK price of £297,000 could fall by £53,000.
Nina Skero, senior economist at the CEBR, said: “If you were looking for a quick ‘flip’ [buying a property and selling it on fast for profit] then getting your deposit back may be a good idea. However, while we expect Brexit to take a serious toll on the economy for the rest of 2016 and in 2017, we do not expect a catastrophic slowdown. Therefore, if you are treating these apartments as a long-term investment they are probably still a good choice.”
Mark Hayward, managing director of the National Association of Estate Agents, also warned against pulling out hastily. He said property prices would keep rising, especially because of the shortage of new homes. “We also don’t expect the rental market to be particularly affected by the vote, so there will be a continued demand for properties to rent,” he said.
“As her two properties are new, maintenance costs will be low, making for a good return on the investment. It’s laudable that the developer is giving her the opportunity to exit. It is obviously confident of being able to resell immediately.”
I am in my early sixties and had planned to retire next year, but most of my savings are invested in the stock market. Should I sell or stay?
As you approach retirement, it is a good idea to reduce your exposure to riskier investments such as shares. However, Adrian Lowcock, head of investing at Axa Wealth, said you first need to consider how you want to use your nest egg.
“With the new pension freedoms you have a lot of choice: you could buy an annuity, take it all out as cash or remain invested and draw an income over time,” Lowcock said.
“If you are thinking of buying an annuity or going into cash, you should really consider beginning that switch-over now.
“You should do this not just because of Brexit but because any further stock market shocks could cut the value of your pension and you would have no time to recoup those losses.”
If you plan to remain invested and start drawing on your fund, make sure you have a cash buffer. Lowcock suggests having enough cash to cover you for up to three years of retirement spending. “By doing this you will not be forced to sell shares just at the wrong time — when the prices are falling.”
Next, ensure the bulk of your investments generate a reasonable income and are relatively low-risk. Lowcock suggests moving about half your funds into bonds and some alternative assets, such as infrastructure and commercial property funds. It is also worth having exposure to shares through an equity income fund that is globally diversified. His top picks are JP Morgan Equity Income, Fidelity Global Dividend and Woodford Equity Income.
“It is important to still have some shares as they have the ability to grow their dividends and beat inflation over time,” Lowcock said.
“In a year’s time, we could see a temporary pick-up in inflation due to the weaker pound, so rising dividends could help mitigate the effect.”
What’s the sensible thing to do if I think I could be made redundant?
Last week a survey of more than 1,000 business leaders by the Institute of Directors found 23% were putting a freeze on recruitment and 5% would be making redundancies. Also, 22% said they were considering moving some of their operations overseas.
If you are concerned about job security, it is a good idea to build up an emergency cash reserve. This could be used to cover your normal monthly costs, such as your mortgage, council tax, energy bills and food bills.
Danny Cox at the investment provider Hargreaves Lansdown suggests holding at least the equivalent of six months’ expenditure in an easy-access account, such as a cash Isa.
Another option is to buy insurance to cover living costs in the event of losing your job. These policies, typically called unemployment insurance, pay a monthly benefit for up to a year. As a general rule,you will receive about 65% of your previous earnings before tax. The payouts are tax-free.
However, unemployment insurance has been criticised because there are many exclusions. For example, there is a “deferred” period during which you cannot claim after losing your job. This ranges from one day up to one year.
I am worried about rising bills. What can I do?
A weaker pound could also mean higher energy bills as it costs more to import commodities, such as oil.
To avoid sharp increases, you could switch to a deal that fixes the unit price of gas and electricity. The cheapest on the market, available from Flow Energy, fixes the unit prices until September next year. It costs an average of £752 a year for dual-fuel supply. Customers must pay by monthly direct debit.
If you have never switched supplier, you could save about £300 over a year by changing to this deal.