BBR, LIBOR & Swaps: What does it all mean for the buy to let market now?

Author: Mike Freeman Posted on: 09 December 2011

Over the past few months, economic pressures mainly emanating from the Eurozone have continued to influence the markets, and with increasing concerns on the liquidity of many financial institutions, this is being reflected in a number of lenders raising concerns over the cost of funds.

With many banks trying to raise funds through deposits and bonds with favourable rates of return for investors, not all are able to achieve the demanding targets they have set themselves. As a result, there is a need for them to turn to the market’s to raise the necessary funds and in doing so are potentially looking to fund using 3 Month LIBOR.

Unlike Bank Base Rate, 3 month LIBOR is set by 16 banks and is seen by some as a better reflection of the true cost of funds in the market. Given the turmoil experienced by some major economies, the banks feel BBR iSt too low to reflect the true position and have been influencing the LIBOR rate up accordingly.

From its lowest recorded rate of 0.54% in late September 2009, 3 month LIBOR climbed slowly over the next 2 years and at the end of September 2011 sat at 0.90%. Unfortunately, since that time, the rate increases have been considerably more frequent pushing the cost of borrowing ever higher, with the rate now standing at 1.05%.

Whilst a 0.15% increase in 3 Month LIBOR in a little over 2 months is significant, it would be helpful to put this into perspective of what has happened since the rate started to rise.

From September 2009, it took eight months for the 3 Month LIBOR rate to increase by a similar amount. We then entered a period of relative calm, as a further 0.15% increase in LIBOR, to 0.85%, took a further 14 months bringing us up to early August 2011. Additional small increases occurred between August and late September, since when the most pronounced changes have been experienced.

Clearly with the issues faced by the Eurozone and the effects this is likely to have on our own recovery, the banks feel action is essential and the need to push up rates.

Movement in Swap rates has been a little more controlled, with the exception of 1 Year Swap. As at the 7th December, the rates for each £ Swap, as reported by ICAP Plc were:-

Swap Rate Change since 29th September

1 Year Swap 1.05% +0.11%
2 Year Swap 1.31% -0.04%
3 Year Swap 1.36% -0.05%
5 Year Swap 1.65% -0.17%
7 Year Swap 2.03% -0.22%
10 Year Swap 2.20% -0.22%

Not all lenders have adjusted their products, but it is noticeable that some household names have felt it necessary to increase rates over the past few weeks.

TMW currently accounts for the largest portion of the buy to let market and has been suffering processing issues recently. To buy itself some breathing space, at the beginning of December it trimmed its product range and pushed rates up. Part of the rate increase was to stem business volumes, but it was also intimated that rising cost of funds was an influence.

This is a message that has been echoed by other lenders, who are using the opportunity to adjust their product ranges and push up rates for some of their products.

Over the past few weeks, lenders that have tweaked their products include BM Solutions, Leeds, Northern Rock, and Accord. Platform has just announced a rate adjustment, which includes rate increases, and I suspect others can’t be too far behind.