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Brexit and the property market

Brexit and the property market

If you’re a satirist, Brexit is the gift which keeps on giving.  If you’re anybody else, Brexit is probably something you’d really like to see resolved one way or another so you can get on with your life with some idea of what the future is likely to bring (even if you don’t necessarily like it).  If you’re involved with the property market, Brexit could raise all kinds of interesting questions, the answers to which may depend on your personal situation.

If you’re a renter

Brexit isn’t the only reason why it can be challenging to find good rental properties, although it’s unlikely to be helping.  As a renter, the first question to ask is whether or not you actually want to stay where you are.  If you do, then the next question is whether or not you can reasonably expect to be able to afford to stay where you are.  If the answers to both these questions are yes, your best approach may be to continue “as is” for the time being, but to prepare yourself for a potential move if circumstances change.  For example, declutter your belongings as best as you can and try to save some money so you have a deposit handy.  If you have pets, then consider the possibility that you may have to start paying “pet rent” due to the limits on deposits.

If you’re a landlord

Property investment is all about the numbers and now is a really good time to review your numbers and think about how you would navigate your way through whatever Brexit might feasibly throw at you.  In particular, think about what you might do if interest rates were to go up and/or if income tax was to be increased (or a new tax levied on landlords).  If you’re currently living on the investment edge, you may want to think about reducing your portfolio.

If you’re looking to buy

All the standard buying guidelines still apply and need to be taken seriously.  For example, you will want as big a deposit as you can possibly put together and you can expect to be grilled thoroughly about your ability to afford a mortgage over the long term.  That said, if you’re in a fairly stable, “Brexit-proof” job, you could be in an excellent position to buy now, while other people are sitting on the sidelines to see what Brexit is going to throw their way.

If you’re looking to sell

Buyers are still active, although the degree of buyer activity can vary widely throughout the UK.  This means that if you are thinking about selling, it’s probably a good idea to try to take a firm decision sooner rather than later so that you give yourself the maximum, possible time to sell your home.  It’s also strongly recommended to pay close attention to presentation and to be realistic about pricing.  You will also want to choose your estate agent with care, specifically, make sure you can have confidence in their ability and willingness to deal with any complications which arise after an offer has been accepted.

If you’re a homeowner looking to stay put

If you are a homeowner looking to stay put, then the key question is whether or not you can afford your mortgage over the long term, regardless of what happens as a result of Brexit.  If you are at all unsure about this, then you need to look seriously at what action you can take to address the situation.  For example, you might want to think about moving two children into one room so you can take advantage of the Rent a Room scheme.  You might also want to look at your mortgage deal and see if there is any way you can improve it.  For example, you might want to take out a fixed-rate mortgage so that you know that you will have the same payments each month regardless of what interest rates are doing.

If you’d like more information please speak to one of our mortgage advisors

Your property may be repossessed if you do not keep up repayments on your mortgage.

The FCA does not regulate estate agents and some forms of buy to let mortgage 

For estate agents we act as introducers only.

 

Understanding Interest Rates

Understanding Interest Rates

In the UK, interest rates have now been so low for so long that even those who are, technically, old enough to remember the double-digit inflation of the 1980s, may have forgotten what it meant in practice.  It meant that cash deposits could bring could returns for savers – but borrowing could be eye-wateringly expensive.  With Brexit on the horizon and a “no-deal” looking close to certain, now may be a good time to go over interest rates, the theory and practice.

When currencies weaken, interest rates tend to go up

The Monetary Policy Committee of the Bank of England is tasked with keeping inflation at exactly 2%, but since this is the real world, it is allowed a 1% “margin of error” either way.  If inflation falls below 1% or rises above 3%, however, the Bank of England has to write an open letter to the chancellor explaining what it intends to do about it.  If inflation falls below 1%, the BoE has two options.  It can lower interest rates (assuming there is room for it to do so) or it can implement a programme of quantitative easing.  When inflation goes up, however, the BoE’s only option is to increase interest rates.

The Brexit question

If Sterling weakens due to Brexit (or for any other reason), it will increase the cost of importing goods from overseas.  If this cost is offset by gains elsewhere, such as inbound tourism, then the net effect may be zero (or close to it), but if it is not, then either the UK will have to cease (or severely limit) its imports and/or inflation will increase and in the latter case the BoE will be forced to raise interest rates to meet its 2% target.

The only other option would be for the government to change the inflation target in some way, either by permitting inflation to go higher or by changing the means by which it is measured (such as the change from the Retail Price Index to the Consumer Price Index).  This is certainly possible, but it would be politically challenging.  Allowing inflation to rise would potentially impact everyone, including borrowers, whereas allowing interest rates to rise would benefit savers but hurt borrowers. Raising interest rates would also, at least potentially, make Sterling more attractive on the international markets, thus potentially bringing the value of the currency back up and lowering inflation naturally.  Having said that, this tactic did not work for John Major back in 1992, when the UK exited the ERM.

What this means in practice

In very blunt terms, Brexit could mean that savers finally get to see better returns on their cash deposits and borrowers start to see an increase in the cost of financing their debt.  Having said that, it is still very possible that savers will not see enough of a benefit to make it worth their while to readjust their asset allocation in favour of cash.  Borrowers, by contrast, will have no option but to swallow up the higher interest rates as they will be reflected across all lenders albeit to varying degrees.  This means that it is now critically important for borrowers to do everything in their means to pay down debt as quickly as possible and the higher the level of interest payable on the debt, the more important it becomes to pay it down.  If borrowers are unable to pay down their debt immediately, for example, if they have mortgages with long terms, then it may be worthwhile to switch to a fixed-rate product so at least they will have the security of knowing what their payments will be over the life of the product.  As always, however, individuals will need to do their own sums to see if this approach makes sense in their own situation.

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