LIBOR finally goes below 1% 17.07.2009

Author: Simon Whittaker Posted on: 17 July 2009

Just to remind you, BBR was cut to 0.5% in early March and at that time LIBOR was around 2% - but it has taken over 4 months for LIBOR rate to fall below 1% and it currently stands at 0.97%.  This compares with 0.51% for US$ LIBOR ($ base rate 0.25%) and 0.96% for EURIBOR (base rate 1.00%).  These rates are fantastic news for borrowers with existing LIBOR linked variable rate buy to let mortgages – but what about new borrowers.

Here the picture is more mixed.  Mortgage rates are governed by the cost of funds to the lenders – and the existence of savings products from Abbey/Santander paying a fixed rate of 4.15% for 2 years highlights the difference between headline rates (current 2 year SWAP rate is 2.05%) and the true cost of funds.  Broadly speaking, even “blue chip” lenders have a cost of funds that is over 2% higher than the figures that the press likes to focus on when criticising lenders for profiteering.  With the SWAP rates for 5years and over having risen by over 0.5% over the last four months (currently at around 3.5% - implying cost of funds of 5.5%) it is hardly surprising that the cost of a fixed rate buy to let mortgage has actually increased over the last 4 months to around 6.5%. 

So the long and the short of all this is that lenders will need to maintain their current prices just to leave them with a reasonable margin over their cost of funds, and borrowers should not expect either fixed rate mortgages or tracker mortgages to reduce in price over the weeks ahead.  The only factor that could reverse this would be if a major new lender appeared on the scene and we are all waiting .................!
 

Author: Simon Whittaker