aaa credit rating

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?

Mortgages

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.

Loans

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.

Credit Cards

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.

Rents 

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.

Inflation

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.

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6 Responses to UK Loses AAA Credit Rating ~ What Does It Mean For You?

  1. Jose says:

    I was concerned when the U.S. had their credit rating lowered but at the end of the day, it doesnt seem to have had much effect one way or the other. BTW, did you come up with a “Blog Name” for the Mrs yet?
    Jose recently posted..The Bull Market – Are You Running with the Bulls or with the Lemmings?My Profile

    • Hey Jose, I think investors still place trust in US treasuries because they’re perceived to be the best of a bad bunch, it’ll be interesting to see what happens if the FED scales back its bond buying program. Whether investors will give the UK the same liberty remains to be seen, we’re certainly in a precarious economic position over here. As for the blog name, we’re still deciding that one! I’ll be sure to post an update soon.

  2. Good post Adam! Like Jose said, I do not think it had the impact many thought it would here in the States. That said, it’s probably just representative of the bad situation as a whole.
    John S @ Frugal Rules recently posted..Losing Isaac – Finding Life in the Death of a ChildMy Profile

  3. The downrating is stupid unless investors think the UK is going to become a Weimar republic. We have a sovereign currency. Full stop. We cannot default on loans made in sterling by definition and no part of the UK public sector can issue bonds other than the government. That is different to the Euro zone where each of the individual 17 governments can issue bonds and crucially they are not backed by the ECB. This is why the US has not been affected by their downgrade either.

    Either Osborne knew that and believed the ratings agencies wouldn’t be so stupid – but they were – or he didn’t know that in which case his competence is severely in doubt and he should be removed immediately.

    The one possibly bright light on the UK horizon is Carney’s appointment which Osborne may well rue. It may be that Plan BoE is the real Plan B.

    Investors will still need somewhere to put their money.

    The only issue is whether QE will lead to inflation. At the moment we have effective deflation because of the recession so some QE is necessary to restore money wasted particularly by some banks. It is a tightrope to walk.
    John@TheMoneyPrinciple recently posted..Tax Avoidance for the masses (well some of them anyway)My Profile

    • Thanks for the comment John, It’s a tightrope alright and only time will tell if the downgrade or further QE (If it comes) will have any effect. Unfortunately events of the past few years havn’t inspired me with much confidence when it comes to the actions and rationality of bond market traders. Let’s hope we don’t go back there.

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