LIBOR rate question

by Readers Question

15:23 PM, 2nd June 2014
About 4 years ago

LIBOR rate question

Make Text Bigger
LIBOR rate question

I have two buy to let mortgages with Mortgage Trust that are LIBOR linked and several others that are base rate linked. LIBOR rate question

With base rate likely to increase within the next 12 months I’m currently doing a bit of forward planning.

The answer to this question might be obvious to some, but I haven’t a clue. My question is; when they increase base rate by lets say 0.25% how does that affect my two LIBOR linked mortgages? Does an increase in base rate automatically increase the 3 month LIBOR rate or will the LIBOR rate not be affected by a base rate rise?

Thanks

Rob



Comments

Mark Alexander

15:27 PM, 2nd June 2014
About 4 years ago

Hi Rob

LIBOR generally predicts what the Bank of England base rate will be over the next three months, plus a bit of a margin. Therefore, assuming the banks don't maniplulate the LIBOR rate, it will generally be slightly higher than the base rate when the chances of a rise are low, much higher than the base rate when a rise is expected imminently and could even be lower than the base rate if the base rate is predicted to fall.

I wouldn't be too concerned about rates rising next year tough, I very much doubt they will. As always though, it's best to plan for the worst and hope for the best 🙂
.

Neil Patterson

18:58 PM, 2nd June 2014
About 4 years ago

When the Bank Base rate first fell to 0.5% it took a few years for LIBOR to catch up because the banks were not capitalised enough and not keen to lend to each other. The differential was 2% plus at one point. They have settled down now though with some lenders quoting their 3 month LIBOR from 0.53% to 0.6%.

I would be more worried about Interest rates not moving at all as it will be a sign that the recovery is stalling.

Rob

21:26 PM, 2nd June 2014
About 4 years ago

Thanks for explanation it's now clear, although I think interest rates not moving from there current 0.5% is great news for a lot of investors in terms of monthly profits even if it does mean the economy is stalling. Me for one )

John Constant

8:21 AM, 3rd June 2014
About 4 years ago

Rob, I would endorse what has already been said above, and just to add that in the "old days" pre credit crunch, there was hardly any difference between LIBOR and BoE base rate, just a few base points, despite having no formal link between them. It is a relief, as a mortgage broker, to get back to those stable conditions. If however, you want to plan for the worst case scenario, there are some pretty reasonable 5 year fixed rates around.

Mark Alexander

8:25 AM, 3rd June 2014
About 4 years ago

Reply to the comment left by "John Constant" at "03/06/2014 - 08:21":

Good point John.

It is also possible for a landlord to fix or cap an interest rate with refinancing, without sacrificing a favourable interest rate margin, regardless of LTV and credit status and without paying any fees to a lender or a solicitor. This is achieved through a regulated insurance product. For further details see >>> http://www.property118.com/landlords-money-saving-tips/64261/
.

Andrew H

8:41 AM, 3rd June 2014
About 4 years ago

In real terms for the borrower, if LIBOR is effectively an exaggerated base rate (either way, up or down) are there any benefits of being on a LIBOR linked facility? And is it always advisable to opt for a base rate linked facility rather than LIBOR?

Thanks in advance.

Andrew

Mark Alexander

9:05 AM, 3rd June 2014
About 4 years ago

Reply to the comment left by "Andrew H" at "03/06/2014 - 08:41":

Great question.

In my experience, LIBOR has always been fractionally higher than the BoE base rate. Most lenders don't give you a choice between the two though and other factors such as margin, fees, criteria etc. have to be taken into consideration. Therefore, you can't really say that one is better than the other across the board.

In my opinion though, both LIBOR and BoE linked trackers are far more safe than a lenders SVR. I don't likes deals where a lender sets interest rates according to "market forces". The risk with SVR's is that if a lender wants/needs to exit from a certain niche they could simply increase their SVR. Without the transparency and links to a rate which is set independently I think SVR's present a much higher risk to borrowers.
.

Andrew H

9:27 AM, 3rd June 2014
About 4 years ago

Reply to the comment left by "Mark Alexander" at "03/06/2014 - 09:05":

Many thanks Mark - great advice.

Colin Dartnell

22:32 PM, 4th June 2014
About 4 years ago

Reply to the comment left by "Mark Alexander" at "02/06/2014 - 15:27":

Hi Mark, You are hopefully right that interest rates will stay as they are for some time to come or at least not move by much. I would be more worried by the lenders all eagerly awaiting the outcome of the Bank of Ireland and the West Brom increases to see if they too can get away with increasing their tracker rates to existing customers. I do get fed up with people saying how I should be pleased I have had low rates for a long time and should, basically keep quiet and stop moaning about increases. But if there hadn't been low rates I wonder how many extra homes would have come available for letting?

Colin McNulty

7:46 AM, 8th June 2014
About 4 years ago

With the ECB having just dropped its interest rate from 0,25% to 0.15%, I'm thinking that has reduced the chance of a rise in base rate happening soon.


Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Shelter's website says Section 21 does not cause homelessness

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More