Only a week ago, we had startling news about the Bank of England dropping its rate of interest, from four and a half percent down to three percent. Over three dozen mortgage lending entities have withdrawn their trackers rate products with the stated intent of reviewing them and releasing them once more into the market sometime this week. London Interbank has shown the interest for Libor, or the bank to bank loan rate, as dropping by a little over one percent.
You may be surprised to learn that the base rate for interest is not the most significant factor when lenders determine how to price their interest rate products. Rather, the most significant factor is the bank to bank loan rate for a loan period of three months. Libor continues to persist at nearly a percent and a half higher than the base rate of the Bank of England. If we’re ever to see the gap between mortgage rate values and base rate values close, then what must first happen is the shrinking of the difference between the bank to bank rate and the base rate. This is unfortunately a complex and large-scale process beyond the control of any one person, so we’ll all have to cross our fingers.
Rather amusingly, banks continue to play cynical with each other, keeping their Libor rates high instead of trusting and cooperating with the other banking institutions. They continue to insist on more overall stability in the market before they take the risk of lowering their bank to bank interest rates, which will be, as with many things in the marketplace, a gradual and drawn-out process. Ironically, the refusal of banks to play nice with each other is one of the contributing factors to instability in the first place. How can the public trust banks when banks don’t trust each other, after all? Worse still, many banks are saving unnecessary amounts of funds to artificially inflate their annual financial reports. At least the government is attempting to nudge banks into lowering interest where investments using taxpayer cash are involved.
It was a rather strange happening last week, when the lenders all withdrew their Tracker rate mortgages after the Bank of England’s announcement. Tracker rate mortgages are beneficial, as they change whenever the Bank of England cuts their base rate. It was hoped that this rate cut would stimulate the economy. Theoretically, with more money available, homeowners can spend more, and with Christmas coming, that can only be a good thing for businesses. Unfortunately, not every home-owner will be effected, and thus, the economy will not be as profoundly stimulated as one would hope. The reason for this is that fixed-rate mortgage holders will not benefit until their “penalty period” is over. Moreover, first-time borrowers have only one lender to turn to, and must put down a 5% deposit. How are they ever supposed to get on the market?
Don’t just jump into things impatiently. If you wait a while, you can expect lower interest rates to come in from various lenders, allowing you to save money if you can stand the wait. Since the overall numbers involved are so large, even small percentile differences can add up to a lot of money saved or wasted, so don’t underestimate the impact of even a tenth of a percent! Things in the financial and banking world aren’t perfect, but they’re definitely starting to look up, so hang in there.
Susan Reynolds is a content coordinator for a leading South African bond originator. For more information visit: http://www.bondcredit.co.za/