Bank of England's What would Brexit mean for mortgages?

We are pleased to see a date finally set for the UK to hold a referendum on its membership of the European Union.

The vote will take place on June 23 and will have profound implications for the British economy and your own personal finances and mortgages. While we take no side on the crucial question, it is important to see the issue resolved quickly for mortgage holders.

Last week, Prime Minister David Cameron negotiated a reform package and is recommending a vote to remain in the EU. Six members of his Cabinet plus Mayor Boris Johnson are recommending a vote to Leave the EU.

The level of opposition has raised the prospect of an exit this week with betting markets cutting odds on the UK leaving to 2-1. Remain is still the odds on favourite with most bookmakers.

The market reaction to the referendum being called has been instant. Sterling has weakened considerably, hitting a seven-year low against the Dollar.
Economists predict it one Pound could fall to as low as $1.35 in the event of Britain leaving the EU, hitting many with living abroad.

Anyone who is paid in Sterling but paying a mortgage in a foreign currency will be hit badly by a falling Pound.

It would make mortgage payments much more expensive for anyone with property abroad in foreign currency and could force banks to look again at their offerings.
Ratings agencies have also reacted strongly to the risk of a Brexit with Moody’s claiming it could downgrade the UK credit rating from AAA.
It warned the UK would need to create a rapid new and effective trade agreement with European countries in order to prevent a downgrade.
Other agencies have already issued warnings with Standard & Poor’s keeping the UK outlook on negative and Fitch also warning it would be harmful.

For mortgages, the UK credit rating affects the bond prices that fund the UK debt which are tied to fixe rate mortgages.
If the cost of funding UK public debt rises then the cost of fixed rate mortgages will likely rise simultaneously irrespective of the Bank of England base rate.

Alternatively a weaker British economy in the wake of Brexit could lead to interest rates being held at 0.5% or even lower to prop up the country. This could be good news for some mortgage borrowers.

Investment banks based in the City of London have also warned they could leave London and locate more operations across the continent in the event of an exit.
If banks are reducing operations in the UK then it is possible it could lead to a reduced number of lenders and less competition.

Less competition could lead to less battles over price and a slow rising of rates but there is much uncertainty as to whether that would happen.
HSBC has recently committed itself to remaining domiciled in the UK irrespective of the referendum result after flirting with a move to Hong King for many years.

While the referendum could have a major impact on mortgages the real effect is unknown and uncertainty is the only constant.
Those advocating a Leave vote argue deals could be struck which would minimise the changes to the UK economy and business environment.