By: Favian ClaiIt is expected now that the long-term cost of mortgage are likely to rise as lenders continue to resist taking on too much business, concerned about another potential bubble.
In the first time in months,
the three-month LIBOR (London Interbank Offered Rate) index, the rate banks charge when they lend each other money, dropped to 0.97%. Just six months ago, that rate stood at just under 2.25%. The LIBOR is primarily used to fund variable rate mortgages but rates for tracker deals have barely budged.
While changes to mortgage costs tend to lag behind moved in the Libor, the margins between funding and the amounts charged by lenders continues to widen, according to moneysupermarket.com. The website's mortgages representative, Louise Cuming told the BBC News that "Banks and building societies are benefiting from the
lowest borrowing rates for two decades but this is not being passed on to consumers".
For first time for homebuyers, it's a very confusing market. On one side, they hear that the cost of funding is at an all time record low, and yet not only are there less deals available to them, but they are seeing mortgage rates reminiscent of just before the bubble occurred.
Arron Strutt, a Mortgage Broker for
Trinity Financial Group said "Thousands of borrowers, especially first-time buyers, will read that the cost of funding is at a record low and wonder why there are not more deals open to them."
Even more confusing is the use of Taxpayer funds as Strutt continues, "With the cost of borrowing reduced and the vast sums of taxpayers' money used to rescue many banks, those with a smaller deposit would like to see more reasonably priced deals available."
Banks are in fear that if they drop rates that make them highly competitive in comparison to other banks, that they might take on more mortgages than they could cope with or fund. Banks are still in the mode of building up capital and the need to attract those who save money.
Despite the lack of lower mortgage rates, lending continues to slightly increase. Consumers are beginning to get at odds with banks who aren't lowering rates, in fear that it could cause them to go bankrupt. Meanwhile both in America and the United Kingdom, Mortgage Rates on
fixed-rate loans are still available at 4 - 5% depending on your credit score.
The Importance of the LIBORThe LIBOR is one of the most important lending rates to look at to understand the health of interbank lending, published by the British Bankers Association daily.
Interbank lending is necessary due to our Fractional Banking System. Sometimes banks run short on money to meet withdrawals on some days, and other days they have too much money on hand. To resolve the potential of the banks going bankrupt, banks lend their surpluses to other banks that have deficits.
Some of the lending is overnight, but a LIBOR bank to bank loan can be up to six months in length. The LIBOR was a critical factor in many banks failures, as the overnight LIBOR rate jumped 431 basis points to 6.88% a few months ago, which began a snowball effect in the economy.
As the drying up of these loans occurred, banks who needed the loans were unable to meet their commitments to those who normally withdrawal cash. People couldn't get mortgages, even if they qualified. Businesses found overdrafts suddenly reduced and loans not being renewed. Credit Card rates went sky-high along with the minimum payments. As you could imagine, this effect then hit every portion of the economy.
To help bring down the LIBOR back in winter 2008, the UK and the US recapitalized their banks with billions of dollars, in addition to guaranteeing lending between banks so banks were safe if an interbank loan was defaulted on.
Before the credit crunch, nobody knew what the LIBOR was. Now it turns out that it is instrumental to the functioning of our modern money economy.
