UK Loses AAA Credit Rating ~ What Does It Mean For You?
For years the UK government has taken pride and even boasted about the fact that the UK has managed to succeed where other countries have failed by maintaining its AAA credit rating. It has also bragged that due to this AAA credit rating, the UK has been able to borrow money cheaply from the markets and as a result consumer credit and mortgage costs have remained low.
In a recent post on Money Bulldog we mentioned that now might well be the time to ‘Grab The Best Remortgage Rates While You Still Can!’. In that post we said that mortgage borrowing costs have been kept artificially low in recent years due to central bank intervention and low interest rates. We also said that with the economy falling down around us and inflation still running above its 2% target, those low borrowing rates may soon come to an end. Yesterdays announcement by Moody’s to downgrade the UK’s AAA credit rating could well be the first sign that those low interest rates could soon be a thing of the past. So how could the loss of the UK’s Triple A credit rating affect your pocket?
Unless you’re lucky enough to be sitting on a Bank of England base rate tracker mortgage, the loss of the UK’s top credit rating may affect your mortgage rate in coming years. The interest rates on most new or existing mortgage deals are often based on rates determined by money markets or even banks themselves, not the Bank of England base rate. The loss of the UK’s AAA credit rating could lead to a rise in borrowing costs for UK banks as a whole, this in turn could lead to a rise in mortgage rates.
The same principle applies to loans. Most loan rates are also based on money market borrowing rates. If lenders lose faith in the UK economy and the ability of its consumers to repay their debts, loan interest rates could well rise.
Over the past few years due to tightening credit conditions, many credit card borrowers have seen their credit card interest rates rise or have even had their credit limits slashed. Now that the UK has lost its AAA credit rating I’d expect that trend to continue.
You might think that because you don’t have any mortgage or credit card debt that you’re immune, unfortunately that’s not the case. If you rent a property your pocket could also be hit. There are two reasons bad credit conditions can raise rents for tenants. Firstly, most landlords have outstanding mortgages on rented properties, as mortgage rates rise rents often follow. Secondly, as buyers find it more difficult to find mortgages demand for rental property goes up and this could again lead to a rise in property rents.
In recent years the response from the Bank of England to rising borrowing costs has been to print money also known as quantitative easing. The problem with money printing is that it can lead to a rise in inflation. If borrowing costs rise due to the loss of the UK’s AAA credit rating, you can expect more money printing from the Bank of England and likely more inflation as a result.
Less Holiday Cash
We’ve already mentioned that money printing can lead to inflation but it can also lead to poor exchange rates. When the Governor of the Bank of England recently signalled further money printing, it lead to a nosedive in the value of the pound against the dollar. The loss of our triple A rating could mean less cash in your pocket when you next go abroad.
Whether the loss of the UK’s triple A credit rating will have a large impact on the overall economy remains to be seen but one thing is for sure, the loss of a AAA credit rating should never be taken lightly.