After years of uncertainty, Boris Johnson’s landslide Conservative majority in December’s general election became the inciting incident for getting Brexit done. With Johnson insisting that the 11-month transition period won’t be extended past the last day of 2020, next year will almost certainly be when the UK begins forging its own path outside of the bloc.
Among the many impacts this will have on its citizens is how they manage their personal finances. Consumer confidence has been steadily dropping since the referendum result in June 2016, largely due to the uncertainty around what a post-Brexit Britain will look like, and concerns about its effect on the UK’s economy.
Research from YouGov shows that roughly two in five (41%) Brits expect their individual financial situations to suffer after Brexit, while just over a fifth (21%) are worried they don’t have sufficient savings in case of emergencies. As well as general spending, Brexit may also dissuade people from borrowing money, for fear of higher interest rates and being unable to pay back what they owe.
But are these risks overplayed? Here’s our assessment of whether the UK’s exit from the EU is likely to affect some of the main personal finance decisions made by consumers.
Buying cars on finance
Since the public voted to leave the EU in 2016, the cost of Personal Contract Purchase (PCP) finance bills have risen by almost 50% on many of the country’s most popular cars. A PCP is essentially a cheap long-term rental agreement that enables people to use a car until the contract is up, with an option to buy at the end. As Car Finance Plus explain: “The monthly repayments are typically lower [than a hire purchase agreement] because you are paying off the value of the depreciation of the vehicle, not the full value of the car.”
However, the tumbling value of sterling post-Brexit has led to many cars costing more, especially those manufactured elsewhere in the EU, and vehicles using parts made in the bloc, which has caused PCP bills to go up sharply. Staggeringly, drivers signing up for a PCP in early 2019 paid a whopping £4,606 more than those that did so two years previously. This has likely played a big part in the decision of around a third of drivers to put off purchasing a car due to Brexit.
There are fears that PCP bills could go up even more once the UK does leave the EU, especially if it does so without a trade deal. This is because a 10% tariff would be applied to finished cars imported from the EU, a price hike which brands including Vauxhall, Citroën, and Peugeot have said they’d pass on to the consumer. With a no-deal Brexit predicted to tank the pound even further, it’s safe to assume that borrowing would become even more expensive too. Even if the UK does agree a trade deal, analysts still predict the sterling will initially struggle as the country’s economic relationship with the EU changes. As such, Brexit may further curtail people’s willingness to buy a car through a finance plan.
That said, it’s not all doom and gloom, since many cars haven’t been affected by Brexit—for example, the cost of renting a Fiat 500 on a PCP plan dropped from £175 to £163 per month between 2017 and 2019. As such, consumers should always shop around for the best deal, and get quotes from a range of dealers to see which offers the best value.
In the run-up to the December 31st deadline, it’s also advisable to ascertain whether the car dealer in question will still honour the deal in the new year. If so, drivers should use the first few days of January 2021 to assess if the pre or post-Brexit offer is better, and save money this way.
Getting a mortgage
Research has found that almost half of prospective first-time house buyers have changed their plans due to the uncertainty around Brexit. This comes in spite of mortgage rates dropping to historic lows, as a result of the Bank of England’s base rate cuts—though many lenders have sought to offset this by increasing their upfront fees. The upside to this uncertainty is that house prices have dropped since the referendum, making this significant purchase far cheaper in a lot of parts of the country. In addition, lower rates have meant that remortgaging has become more appealing to homeowners, with 2018 seeing the highest number of remortgaged loans in a decade.
When it comes to the UK’s departure from the EU, it appears that a no-deal Brexit may actually be favourable for prospective first-time buyers, with experts predicting that house prices could drop by anywhere between 6%-20%. On the other hand, those looking to sell their houses would clearly be badly impacted by Brexit. Beyond steep price drops in a no-deal scenario, it’s unclear exactly what exiting the EU with a trade deal would entail for those looking to get on to the property ladder. Uncertainty looms in regards to property prices, while interest rates could go up or down depending on the economy. For instance, the government may reduce rates to stimulate growth or raise them if inflation becomes an issue. This could also influence whether current homeowners without a fixed rate deal decide to remortgage their properties post-Brexit or not.
Of course, all of the above decisions will be affected by the state of the economy as a whole. The possibility of rising unemployment, higher interest rates, and increased consumer costs in a no-deal scenario could inhibit people’s ability to enter the property market to begin with.
Deciding pension pot investments
For those without a final salary-style pension, who instead rely on a fund, their final pension pot will depend on the performance of their investments. A disorderly no-deal Brexit in particular could have a huge effect on how much money they’ll receive when they retire. If their pension fund is being invested in domestically-focused UK companies that make the majority of their money at home, Brexit could have a massive impact on their pension. This is because, if the economy tanks, the share prices of these businesses will likely drop along with it. However, for those investing in businesses that make their money overseas, Brexit shouldn’t be too consequential, especially as dollar earnings would increase as the sterling drops.
This risk means that many people may seek to change their investment choices either before or after Brexit, especially with more than two-fifths of Brits believing their pension funds will indeed lose value as a result. Most pension schemes will allow members to decide where their money goes, meaning people could choose to shift their investments overseas, or even switch from equity to cash to avoid the risks of the stock market entirely.