Lowering LIBOR – the real cost of mortgages

When the base rate (or `bank rate`) came down, why didn`t the cost of mortgages come down as far and as fast? Mortgage providers have been criticised for not `passing on` the full rate cut, but as the Council of Mortgage Lenders states on its website:

`Far more important than the Bank rate in determining lenders` funding costs is the three-month London inter-bank offered rate (LIBOR).`

Libor - when mortgage providers have to borrow...

Mortgage lenders don`t have infinite money to lend out, of course. They often borrow from other major lenders - and right now, that isn`t cheap. The LIBOR rate (London Interbank Offered Rate) shows the average cost which lenders charge each other to borrow the funds they need so they can give people mortgages.

Changes to LIBOR help explain the cost of mortgages:

• At the start of Autumn 2007, the three-month LIBOR* reached almost 7%. However, since the base rate stood at 5.75%, LIBOR was only 1% or so above the base rate.
• When the base rate dropped to 2% in December 2008, LIBOR was much lower than it used to be, at around 4%. However, this meant it was 2% above the base rate.

Basically, this `spread` (the distance between the base rate and LIBOR) shows that mortgage lenders are still worried about two things:

• They`re worried about other mortgage lenders` stability - nobody wants to lend money to a mortgage provider that might be about to fail.
• They`re worried about their own finances - rather than hand out too many mortgages, they`re keen to keep their money where they can use it if they need it.

...which helps keep LIBOR high... which helps keep the cost of mortgages high.

Gordon Brown: action on mortgage rates

The Prime Minister has promised to try to reduce LIBOR, which should help lenders offer mortgages and other forms of credit at a more competitive price.

* The cost of borrowing for three months - significantly higher than the `overnight` LIBOR rate.

Tags: libor, loans, loan, rate, loans rate, loan rates, base rate, bank of england, mortgage

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