Global stock markets plunged to their lowest levels in months Friday after Britain’s decision to leave the European Union, making an immediate dent in Americans’ 401(k) accounts and sparking concerns about other financial impacts for the average U.S. consumer.
In the near-term, the ripple effects of the Brexit may be felt beyond retirement accounts in the form of lower mortgage rates and a stronger dollar that boosts Americans’ purchasing power. But in other ways, the events taking place across the pond may not lead to much change for consumers who are already used to struggling with paltry rates on savings accounts, rising housing costs and a dimmer outlook for the global economy.
“The Brexit vote just further delays the day savers see any improvement in their returns,” said Greg McBride, chief financial analyst for Bankrate.com. “On the bright side, that European vacation just got cheaper.”
Here’s a look at the different ways the Brexit could affect your finances.
It may be years before Britain is fully separated from the E.U., but Americans may feel some near-term pain in their retirement accounts as markets digest the news.
Market analysts said Friday that stock markets could continue to see ups and downs
over the next several weeks as we learn more about how Britain’s decision will affect the rest of Europe, and how much it can influence the economy at home.
Most investors who are decades away from retirement have plenty of time for their portfolios to recover from any losses they might see in the near term.
But for people who expect to retire sooner, say within the next five years, it may be a good time to look at their savings, insurance and other parts of their retirement plan to make sure they’re prepared to deal with the volatility, said Christian Weller, a retirement income expert and professor of public policy at the University of Massachusetts Boston. For instance, some people may want to make sure they have enough cash on hand so that they can pay for living expenses in their first few years of retirement without having to sell stocks at a time when markets may be falling.
“Start to think about how can you get in a comfortable situation so you can live with the uncertainty,” Weller said.
Mortgages cheaper — for some
Uncertainty over how the global economy will cope with the changes in Europe may cause the Federal Reserve to stay cautious and wait before raising its benchmark interest rate any further this year. As a result, mortgage rates, which were initially projected to rise this year when it was expected that the Fed would raise short-term rates, may actually fall further. The average rate for a 30-year mortgage fell slightly, by 0.1 percentage points, after the Brexit announcement on Friday, according to the online real estate marketplace Zillow.
For people who have been waiting to refinance their mortgage, now may be the time to act.
But the drop in mortgage rates may not offer much of a break to people looking to buy homes. With home prices still high, and inventory still low, prospective buyers may have a hard time finding a house they can afford. Home prices fell slightly this month from May, but are still near all-time highs seen in the fall of 2005, according to a report released this week by Zillow.
“If you couldn’t afford a home two days ago … you still won’t be able to afford a home now,” said Svenja Gudell a chief economist with Zillow. “Home prices aren’t going down.”
For a $160,000 mortgage loan, a 0.1 percent drop in 30-year mortgage rates would only amount to savings of $7 on a home buyer’s monthly mortgage payment, Gudell estimates. Some potential buyers may decide to delay such major purchases until they know more about how Britain’s exit will affect the local economy and their jobs. And prices on luxury homes may actually increase at a faster rate in some major cities, including New York City and San Francisco, if foreign investors who were previously planning to buy homes in England decide to buy homes in the United States instead, Gudell said. If the British economy slows down, buying homes in the United States may be viewed as less risky than buying property abroad, she said.
It’s also not clear how long those lower mortgage rates may last. The Mortgage Bankers Association predicts that 30-year mortgage rates could reach 4 percent by the end of this year and 4.8 percent by the end of 2017 if investors are encouraged by brighter economic news at home, such as an increase in wages.
No hope for savers
Brexit offers little relief for consumers who are tired of earning next to nothing for the money they have in the bank, said McBride of Brankrate. At an average yield of 0.08 percent, the payouts on savings accounts are still pretty close to three-year lows, according to Bankrate.
And with it now looking less likely that the Fed will raise short-term rates, savers should not expect those yields to increase substantially any time soon, McBride said. Even once the Fed does raise rates, savers will need to be patient since many banks will wait before they pass along those higher rates to consumers, he said. In the meantime, savers will need to keep shopping around with financial institutions, including small banks and credit unions, to look for the best deals.
Travel to Europe getting cheaper
There is one bright spot, however, for Americans planning trips to England and other parts of Europe. The British pound plunged more than 1o percent after the decision, leading to the biggest discount against the dollar seen in roughly three decades. If the dollar maintains that advantage against the pound, it could essentially lead to discounts on tea, theater tickets and meals for Americans traveling to Britain, said George Hobica, president and founder of Airfarewatchdog.
It could also become cheaper for Americans to fly to Europe if Britain’s move leads to slower economic growth abroad. Round-trip fares to main destinations in Europe, including London, Amsterdam and Madrid, are already falling. For example, a round-trip flight from Chicago to London was
going for about $580 for travel in the fall on Friday. Prices could sink further if Europeans cut back on their travel to the United States, Hobica said, because airlines might be tempted to discount those flights for Americans in an effort to fill those empty seats.