BoE Base Rate - Mortgage Rate

caveman38

If as expected the BoE Base Rate is reduced to 3% perhaps 2% by the middle of next year. Would the mortgage rate follow or is it tied too much to LIBOR.
If is does follow and the mortgage rate becomes 4% or lower, do we assume that there will be a stampede back into the housing market and prices rocket. Is this too simplistic or what?

opinions4u

Typically mortgage rates have always been around 2% higher than the BofE base rate.

Typically LIBOR has had a mid point somewhere between the two which drives the mortgage rate.

Over the last few years the vast majority of borrowers have been on some sort of deal that is approximately 0%-1.25% above the BofE rate - the differential has been driven by the LIBOR rate at the time - which has been kept low by the easy availability of wholesale funds (typically an investment by big American pension funds and other large scale investors around the world).

As these funds have dried up, the cost of LIBOR has taken on a mind of its own. Less supply of funding = higher LIBOR rate = exceptional competition for our savings.

Unfortunately, this also means more restricted mortgage lending at higher rates. Whereas trackers used to be available at less than the BofE rate, they are now typically 1.5%-2.0% higher. Reflecting the LIBOR rate.

It does not automatically follow that lower BofE rates will mean lower mortgage rates. While a lot of focus is given to borrowers on 'standard variable rates' (SVR) these reflect less than 20% of all mortgage customers.

The wholesale funds may return to the market but this is dependent on:
1) Confidence in the housing market (including the USA housing market)
2) Confidence in the banks

The problem the banks have is that over time they need to remove their reliance on wholesale funding. Otherwise we will see the credit crunch repeat itself in the future threatening the existence of the financial system.

So this in itself will dampen the housing market and make mortgages harder to come by - specifically higher risk customers (sub prime, low deposit, short-term self employed) will find it much harder to borrow in future.

So in answer to your question, lower base rates may help LIBOR drop a little, but there are much broader things affecting the LIBOR rate in the current climate. 2% off BofE may only reduce LIBOR by half the amount.

Bismarck

I'm wondering if there is a floor below which mortgage rates would never go, bearing in mind the margins that the banks want to keep - I'm only guessing but suggest that 4% is the lowest they would allow it to go to to make it worth their while.

Sun

As far as I know,

Nationwide and Halifax tracker has floor of 2.75% and 3%

HSBC tracker has no floor limit.

neil40

Im hoping the BOE rate drops even more as im coming to end of fixed rate.My interest after that goes onto 0.75% above BOE base rate for rest of mortgage.Would'nt mind getting another fix but not paying 6%.....Neil