Banks may refuse to cut mortgage rates
Borrowers have been warned not to expect mortgage rates to come down despite signs that interbank lending is getting cheaper.
According to online mortgage broker mform, the interest rates at which banks lend money to each other - known as Libor - have dropped significantly over the past month, potentially enabling banks to pass on savings to new customers.
Rates on two, three and five-year money, which is used by mortgage lenders to fund fixed-rate deals, have fallen by as much as 0.6% since the start of October. Two-year fixed-rate cash has reduced from 4.76% to 4.32%, three-year cash from 4.85% to 4.27% and five-year from 4.96% to 4.56%.
“Falls in the money market rates of up to 0.6% is a healthy sign of good news on the way for borrowers who need to remortgage and also for new borrowers,” says Francis Ghiloni, marketing and business development director at mform.
Libor has remained stubbornly high in recent months, despite the Bank of England cutting interest rates to 4.50% last month. The average two-year fixed-rate deal stands at 5.19%, but borrowers looking for the security of a five-year fixed-rate deal face rates of 5.62%.
Despite the recent falls, David Hollingworth, a mortgage broker at London & Country, warns that mortgage lenders are still very cautious about passing cuts on.
“While there are signs that the cost of mortgage funding is falling, lenders are in no rush to pass on the savings to borrowers,” he explains. “There have been small moves in fixed rates by lenders such as Nationwide and Abbey, but profit margins on tracker products, for example, are still increasing.”
And although the MPC did reduce interest rates by 1.5% in November, Hollingworth urges caution.
“Libor will start to come down but it will be a very slow process because lenders are simply not able to lend on any great volume,” he says. “It would be a brave move for any lender to launch a cheap and attractive product because they would face an avalanche of business.”
Meanwhile, existing customers on lenders’ standard variable rates have been warned not to expect to see their rates fall even if the Bank of England does slash the base rate.
David Hodgkinson, head of banking giant HSBC, recently told customers that it cannot guarantee to pass on rate cuts. Although the bank has said it will pass on November's 150 basis point cut to borrowers, it is not clear what action it will take in the future if/when rates are cut again.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.