A sharp fall in the value of the pound has had knock-on effects for mortgages, pensions, holidays and more.
Since Chancellor Kwasi Kwarteng announced his mini-budget on Friday 23 September, the value of the pound has fallen sharply compared to other currencies.
Holidaymakers will have been among the first to feel the effects, as the cost of buying meals and hotels abroad will have increased.
It’s also had serious consequences at home, with a risk that interest rates will rise further, leading to several banks withdrawing their mortgages from the market, and even pension funds feeling the strain.
The Bank of England has already intervened, buying government bonds in an attempt to stabilise the market. But with no change to the base rate scheduled until 3 November, and a ‘medium term fiscal plan’ from the government not due until 23 November, the next few weeks could be chaotic for the economy, and for households.
Here, we explain how your finances might be affected, and what to do next.
- Please note: this is a fast-moving situation, and our stories are being kept as up-to-date as possible.
How do rising interest rates affect me?
The fall in the value of the pound threatens to drive inflation, already at 9.9%, even higher. This is because we'll have to pay more for items we import from abroad, such as oil.
Firms could then choose to pass these higher prices onto customers, pushing up inflation.
The Bank of England seeks to control inflation by raising the base rate - the rate at which commercial banks pay to borrow money from it. A higher base rate usually means higher interest rates for borrowers - including mortgages, credit cards and loans - which, in turn, tends to encourage people to spend and borrow less, and slow down rising prices by reducing demand.
The base rate has recently increased to 2.25%, and it looks near certain that the Bank of England will raise the base rate again on 3 November, if not earlier.
Higher interest rates mean higher repayments on your mortgage (if it’s not fixed), and possibly higher repayments on credit cards and personal loans.
Banks usually pass on higher interest rates to savers, but it's not clear if this will continue to be the case. Bear in mind that if the rate of inflation is higher than your savings interest rate, your money will be devalued faster than it's growing.
What will happen to my mortgage?
Lenders have withdrawn hundreds of mortgage deals from the market since the mini-budget on Friday 23 September.
If you’ve yet to apply for a mortgage, talk to a mortgage broker, as there are still deals available. Brokers have access to multiple lenders, including some that don’t deal directly with consumers.
If you’ve applied for a mortgage and received a mortgage offer, you shouldn’t be affected.
Homeowners who are due to remortgage should have a think about their options; those on tracker or standard variable rate (SVR) mortgages may want to think about moving to a fixed-rate deal, which tend to be less expensive and won't be affected by future base rate rises. Again, a mortgage broker will be able to outline which deals are best for you.
Your mortgage documents should tell you what sort of mortgage you’re on, and if it’s fixed, when the fixed period expires. If in doubt, call your lender.
- Find out more: what to do if you need to remortgage
What if I can’t afford to pay my mortgage?
Talk to your lender as soon as possible.
They could offer a payment holiday, temporary payment arrangements, lengthen the term of your mortgage to reduce the monthly repayment, or switch you temporarily to interest-only repayments.
Lenders don’t want to see you get in financial trouble, still less repossess your home.
But it’s important to reach out before you start missing payments, which could seriously affect your ability to borrow in the future.
- Find out more: next steps if you can't pay your mortgage
Is my pension safe?
There have been concerns about whether pensions will be affected by the value of the pound - but this only applies to certain types of pensions, and there are protections in place should something go wrong.
If you have a final salary or defined benefit pension, where you get a regular payout once retired, this is most likely covered by the Pension Protection Fund (PPF).
This means if your pension fund goes bust, the PPF will pay 90% of what you would have received - or 100% if you’ve already retired.
If you’ve got a defined contribution pension - where you and your employer pay into a pension pot, with no guaranteed payout - then you may have noticed your pension's value fluctuate in recent days, along with stock markets.
If you're not approaching retirement, don't panic - pensions are long-term investments that are designed to smooth out short-term market volatility over time.
If you are approaching retirement, or already retired, you may also want to be more careful with your spending, as a falling pound and rising inflation can mean your retirement income won't stretch as far.
If you receive an annuity and the provider goes bust, you’ll be paid 100% of it by the Financial Services Compensation Scheme (FSCS).
What if I'm about to go on holiday?
The falling value of the pound will make purchases abroad more expensive, as your pounds won't buy you as much in foreign currency.
However, costs that you've paid already - such as your flights and hotel - won't change.
To minimise your outgoings, watch out for fees from your bank when using your debit or credit card abroad. It's best to opt for those that offer fee-free foreign purchases, as offered by these debit cards.
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source https://www.which.co.uk/news/article/what-the-falling-pound-means-for-your-mortgage-pensions-holidays-and-more-a3WOe9s96Px5