What Brexit means for your mortgage

The decision by voters to leave the European Union is set to have a significant impact on many aspects of our lives. In the short term, there is likely to be uncertainty, particularly in financial markets - so what does Brexit mean for mortgage rates? We look at the two most likely outcomes of the EU referendum verdict.

Mortgages rates could rise

Before the 23 June referendum, the Treasury predicted that a vote to leave the European Union would result in an increase in borrowing costs of between 0.7% and 1.1% (in addition to what might happen anyway). The Prime Minister claimed that the average cost of a mortgage could increase by up to £1,000 a year after Brexit.

After the Brexit vote, the Bank of England chief Mark Carney came out early to reassure markets and resisted any move to increase interest rates in order to shore up the falling pound. However, if there is any perceived weakness in the banking system, money stops moving between institutions, causing a 'credit crisis' of the type that happened after the fall of Northern Rock in 2007.

If this was to happen, the current raft of low-rate deals could be withdrawn and not replaced, leaving borrowers stuck on higher standard variable rates.

Possible interest rate cuts could see the costs of borrowing fall

While interest rates may still rise, The Guardian reports that it is “just as possible that they could fall to provide liquidity and restore order to markets”.

As markets reacted to the referendum result on Friday morning, two-year 'swap' rates - the rates at which banks lend to one another – fell by 33%. Five-year 'swap' rates fell by 36%.

These falls mean that the mortgages could actually become cheaper. This is because the cost to lenders of longer-term funding has become cheaper, allowing banks and building societies to charge less for mortgages.

In addition, the vote for Brexit could increase the chances of a recession or a period of very low growth. In this scenario, some economists believe that the Bank of England could actually cut interest rates, meaning the cost of lending could actually fall.

David Tinsley, UK economist at UBS, said he expects two rate cuts from the Bank of England over the next six months, taking interest rates from a current record low of 0.5% to zero. If this were to happen, it is likely that millions of borrowers on tracker mortgages could actually see their repayments fall.