How has Brexit impacted loans, mortgages, and interest rates in the UK?

When Britain voted to leave the EU in June 2016, many questions were immediately thrown into the spotlight.

What would this mean for trade? How would it affect travel? What would the impact be on supply chains and the prices of consumer goods? Would leaving be a ‘soft’ or ‘hard’ Brexit?

Things are much clearer now that Britain has officially left the EU, but one area that has been and continues to be affected by this departure is personal finance. This huge political milestone has had major economic implications, and here we examine what Brexit has meant for loans, mortgages and interest rates in the UK.

Interest in second charge mortgages has surged

In early 2019, the Financial Times reported that Brexit was forcing borrowers to seek out second charge mortgages in light of the UK’s economic uncertainty at the time. One provider, Thistle Finance, shared that it had experienced a 12% year-on-year increase in activity in the fourth quarter of 2018.

“It’s common knowledge that the seconds market is thriving and the fact that people don’t want to jeopardise extremely low mortgage rates is certainly a key driver in this,” said managing director Mark Dyason.

This explains why second charge mortgages can be better than remortgaging, because it means you can get the cash you need without giving up the interest rate on your existing mortgage. As notes: “If you’re already on a pretty great fixed-rate deal, remortgaging might work out more expensive than you want it to be.”

Fast-forward to the present day and second charge mortgages are still popular, but Brexit is no longer the driving factor — now it’s Covid-19. While some are seeking secured loans for investments, others simply need the cash due to the economic challenges of the pandemic.

In a report by Property Reporter, Matthew Corker, operations director at Knowledge Bank, explained: “There are those who have increased their savings through lockdown and are now using a larger deposit to either invest in property or add to their existing home. But there are also those who have been hit hard, either losing their job or being put on furlough.”

Interest rates have dropped significantly

Brexit has impacted the Bank of England (BoE) base rate in the past. Following the result of the 2016 EU referendum, the interest rate was halved from 0.5% to 0.25% to prevent a post-Brexit recession while the economic fallout from the vote remained unclear.

While this was bad news for savers who received barely any returns on their cash, this was positive for borrowers as it meant they could take out loans at lower rates. Within two years the base rate had risen to pre-referendum levels, but this was still only up to 0.75%.

Since then, the Brexit transition period has ended and trade deals have been agreed upon, which suggests the UK’s EU breakaway may no longer be so influential on the base rate. That said, as per the BoE Monetary Policy Committee’s February 2021 meeting notes, there are still firms in the Decision Maker Panel “citing Brexit as one of their top three sources of uncertainty”.

Yet, as with second charge mortgages, the pandemic has eclipsed Brexit as the most pressing economic issue at present. Currently, the base rate is 0.1% — its lowest rate in history — and has been this way since 20th March 2020. There have even been suggestions that negative interest rates could be a possibility, which means savers would have to pay to keep money in their bank accounts.

Borrowers, on the other hand, would actually end up paying less than they borrowed. However, as MoneySavingExpert’s Callum Mason notes: “Brexit is likely to feed into this – yet even if it has a short-term negative economic impact, as most economists predict, its impact is still for now likely dwarfed by the pandemic’s, and negative rates are still a possibility more than a probability.”

Larger credit card fees for EU purchases have been touted

Earlier this year, it was reported that from October both Visa and Mastercard plan to raise the fees they charge EU merchants when UK credit cardholders make online purchases from 0.3% to 1.5%. This could potentially affect transactions involving airlines, hotels, car rentals and holiday firms. These interchange fees for transactions within the UK had been capped by Brussels since 2015, but Brexit means this no longer applies to UK-EU payments.

On the surface, this shouldn’t impact UK consumers who buy on credit as these fees are being charged to the merchant rather than the customer. However, the worry is that EU businesses will offset these charges by increasing the price of their goods and services to British clients.

Nevertheless, this change is still months away and it’s possible that organisations will be able to find a way around it. As BBC global trade correspondent Dharshini David explains: “With the increase not coming in for several months, international companies may look at ways to reclassify UK sales, to avoid the charges.”