Increasing Libor rates push Tracker rates up

Posted on 30 September 2011 by Drew

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In the past few days we have seen a major lender hike their Tracker Rates and Arrangement Fees, as a result of a rise in the cost of funds which is linked to recent increases in the Libor rates.

For those who don’t know, Libor is the “London Inter Bank Offer Rate” and is basically the rates at which lenders lend money to each other. The sharp increases that we’ve seen in recent weeks are concerning as Libor Rates are now at levels not seen in over 2 years.

Following the fallout from the collapse of Lehman Brothers 3 years ago, Libor rates shot up as spooked lenders globally ran for cover, and 3 Month Libor reached a peak of 6.30% with Bank Rate at 5%. Over the next few month as the Bank Rate fell to its current home of 0.5% in March 2009, Libor Rates fell as well. However as they partly reflect the confidence that lenders have in each other, Libor rates took longer to hit their own low, and it wasn’t until 6 months later in September 2009 that 3 Month Libor reached bottom at 0.54%.

While Bank Rate has remained anchored at 0.50% for the last 30 months (and still not likely to go anywhere soon), the Libor rates have very gradually risen, to where at the start of 2011, 3 Month Libor stood at 0.77%. For most of this year it has stayed steady between 0.80% - 0.83%. However in the past 6 weeks we have seen Libor Rates rise very quickly as concerns over the future of the Eurozone and the Euro itself have grown, and the overall global economic outlook has deteriorated. The result is that 3 Month Libor has shot up by 11bps to currently stand at 0.94%.

To put that in context, it took 17 months for 3 Months Libor to move 23bps from 0.54% to 0.77%, yet in just 6 weeks it has moved almost half of the previous amount. This is a big indication of the nervousness between the banks over the exposure they have in Europe. Although savvy institutions will have either gotten rid of or diluted their Greek exposure, they are all petrified that when (rather than if) the expected Greek default finally occurs, no one actually knows what the ramifications will actually be. Once again like with Lehman’s in 2008, we would be in totally uncharted waters, and this where we may see lenders reigning in their appetites to lend until the dust has settled, and some sort of normality has returned.

The sudden hike in Tracker rates and arrangement fees earlier this week is the first move by a major lender as a direct result of the increase in the cost of their funding. They may be the first of many. 

The message from John Charcol is clear. If you want a good tracker rate, particularly one that is for the term of your mortgage, then you should contact us sooner rather than later, but it’s also worth revisiting longer term Fixed Rates, as the recent reductions we’ve seen in 5 Year Rates, has shrunk the margin between these and term trackers to levels that are starting to make sense to many borrowers. The gap between Term Trackers and 5 Year Fixed Rates hit around 2% earlier in the year but are now around 0.61% - 0.72% depending on the LTV.

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