The average debt management plan (DMP) takes an average of five years...
How Brexit could affect your finances if you’re in debt
The people of the UK have spoken and have decided that we should leave the EU. There are endless articles online about the political ins and outs, arguing one side against the other. We’re going to sidestep the debate and instead investigate the practical implications of Brexit on your finances.
The short answer to how Brexit will affect the majority of people is this: things will probably carry on as normal, in the short term at least.
The long answer is a bit more complex…
The key thing to note is that very little has changed since the vote to leave the EU and it’s still too early to see what the long term impact of Brexit will be.
We do have a slightly better idea about where the potential changes to your finances could occur, based on short term predictions of the economy. So let’s take a look at the different areas that Brexit could affect you, and how soon these changes could happen.
Mortgages and rental costs
Most people’s single largest monthly bill is their mortgage or rent, so it’s understandable to worry about the potential implication leaving the EU could have on your housing costs.
The good news is that there are some short-term predictions that mortgages could become cheaper as lenders look to entice borrowers with better deals. There have been hints from Mark Carney, the Governor of the Bank of England that the base rate of interest could be reduced in the immediate term, which would further help to keep mortgage costs down, although the prediction is still for it to rise 1% by the end of the year.
The longer-term future of mortgages is notoriously hard to predict, but George Osborne, the previous Chancellor of the Exchequer, predicted that mortgage costs are likely to increase if we leave the EU.
There are also some predictions that the current economic uncertainty could lead to the housing market slowing down, as people choose to delay buying properties. If people are less willing to sell, it could have the knock-on effect of rental properties being in short supply, with the potential for rents to rise due to the imbalance between supply and demand.
The cost of living
One of the key numbers to keep an eye out for when considering the cost of living is inflation. This is the change in the cost of everyday goods and services – things like housing costs, transport, food and fuel. You may have noticed that for the last few years inflation has remained low.
However this is predicted to increase to around 1% by the end of the year. This means the average cost of goods and services is set to rise, although these will rise at different rates depending on what you’re buying, and where you are in the country.
One of the most immediate effects of the referendum result was the value of the pound dropping against the US dollar. In the short term this will impact on the cost of imports traded in US dollars, and to a lesser extent Euros. Crude oil is bought and sold in US dollars, so the cost of fuel at the pumps could rise.
As close to half of our food is imported from the EU, currency exchange rate changes have the potential to impact food prices, particularly those that we import.
The long-term impact of Brexit on food prices is unclear but UK farmers currently benefit from EU subsidies which they may no longer receive. If the UK Government doesn’t replace these then it’s likely the costs will be passed on to consumers, leading to further increases at the supermarkets. We will have to see how the Brexit negotiations unfold, but in the short term there will be no change until we formally leave the EU.
Gas and electric bills are more of a mixed bag. There are predictions that energy costs will rise because of uncertain currency markets, although some respite may come from a commitment by the leave campaign to remove the 5% tax on fuel bills. It will be up to the new Prime Minister and her cabinet to decide whether this comes to pass.
Some experts fear the fall-out of the Brexit decision could lead to a rise in unemployment and cause wages to stagnate, with the Treasury predicting that the average worker could be up to £780 a year worse off.
It will take at least two years for us to actually leave the EU though, and economic predictions over this kind of timescale have a history of being unreliable. While there’s slightly more certainty over the immediate term predictions, anything beyond that for wages and employment is notoriously hard to guess.
There’ll be no immediate changes to the UK benefits system following the decision to leave the EU. However, as the ability to pay benefits is based upon the Government’s ability to bring in money, if the economy struggles and there’s less money collected through taxes it could lead to spending cuts on welfare benefits.
Changes to the benefits system are decided by the UK Government. We know that we’ll soon be seeing Theresa May as Prime Minister following David Cameron’s announcement he was stepping down as PM, so the approach to Government spending and welfare benefits is currently uncertain.
Like benefit changes, there are currently no immediate changes planned to the tax system and it’s unlikely we’ll see any large changes in the short-term. However, former Chancellor, George Osborne believes that tax rises and spending cuts are likely. Nothing will be decided until the new Prime Minister has makes her economic plans clearer.
Impact for people in debt
There aren’t any immediate implications of Brexit for people struggling with debt. There’s likely to be a period of uncertainty as the UK separates itself from the EU and the legal implications are worked out. This will obviously take some time though, and it’s possible things will continue as they are for at least the foreseeable future.
Financial institutions such as banks and credit card companies have seen share prices drop following the Brexit news, but this shouldn’t change the way they deal with their customers in debt. There are no changes to what creditors can do to collect debts, so things should carry on as normal.
If you’ve got debts that you’re worried about then you should get free and impartial debt advice. If you’ve already sought debt advice and are dealing with your debts then you should carry on as usual. If your situation changes then it may be worth getting some more advice, but Brexit itself won’t change anything for now.
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