Mortgage providers don’t ‘automatically benefit’ from rate cuts

19 November 2008

Mortgage providers do not automatically benefit from base rate cuts, the Council of Mortgage Lenders (CML) has pointed out.

In its ‘News and views’ newsletter on 18th November, the CML explained that the cost of funds to mortgage lenders depends ‘not on Bank rate, but on a range of other factors, including what they have to pay savers to attract deposits, how much it costs them to borrow in money markets, and the costs of holding capital and sufficient liquidity’.

The newsletter reminds readers that the three-month LIBOR (London Interbank Offered Rate) is ‘far more important than the Bank rate in determining lenders’ funding costs’.

Normally (i.e. before the credit crunch), LIBOR had tended to vary between 0.15% and 0.2% above the base rate, but in recent months it has been much higher, which means the banks are paying more for funds.

Finally, the CML newsletter explains that as around half of all existing mortgages are fixed-rate deals (which never change with the base rate) and around 40% are tracker deals (which change automatically), the whole debate about rates for existing mortgages is only relevant to the small percentage of mortgage holders on variable-rate mortgages.

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Related Resources:

• Remortgage