Bank Woes Ensure Interest Rate Will Stay Low

sabretoothtigger

Thrugelmir wrote: »

But are they actually lending more? House prices have dropped so people remortgaging haven't the same LTV. Very clever marketing spin.

Thats the advantage to paying off as much of a mortgage as possible I guess, flexibility. Otherwise at the moment with 0.5% rates why would anyone bother to overpay

Thrugelmir

inspector_monkfish wrote: »

i may be wrong, but i think what lemonjelly is getting at, is...... if LIBORs are coming down, why aren't the Bank's mortgage rates ?

well thats what i think he is getting at anyway

Putting LIBOR rate linked mortgages aside to avoid confusion.

LIBOR is the inter bank and inter bank / BOE lending rate. Everyday the banks are required to balance their books. In simple terms some have surplus cash and some are overdrawn. Everyday 20 major banks are polled to see what they'll lend at. The top five and bottom 5 banks in the list are discarded ( ie highest / lowest rates). The remaining 10 are averaged, and that is the set LIBOR rate.

So LIBOR has no direct influence on mortgage rates.

Banks require people to save with them to fund mortgages. To attract funds they need to offer attractive rates.


Mortgages require longer term finance. When a bank offers a fixed rate term mortgage. It normally secures the funding on the back of an equivalent fixed rate savings bond. Whether it be 2/3/5 years etc.

Longer term funds are raised by issuing corporate bonds - 10 years and over. Thats why redemption penalties are high on exit of fixed rate mortgage products. As banks and building societies are still committed to paying interest to the lender for the entire term.

People forget that banks only start with a certain capital base. The majority of their lending is dependent on retail and wholesale funds. Building societies normally require around 100 savers to fund each mortgage. Savings ratios have dropped over recent years so there is less money available to lend.

Thrugelmir

sabretoothtigger wrote: »

Thats the advantage to paying off as much of a mortgage as possible I guess, flexibility. Otherwise at the moment with 0.5% rates why would anyone bother to overpay

How many people have a 0.5% rate ? Not many.

Mortgage interest is calculated monthly ( by most lenders). So repaying quicker has the benefit of compounding the interest saving. Additionally for a lot of people its a good discipline.

inspector_monkfish

Thrugelmir wrote: »

So LIBOR has no direct influence on mortgage rates.
.

quite correct
but you did used to get some LIBOR linked mortgages not so long ago (or did i just dream that ? )


i actually work in the interbank markets (gbp cash trader)
part of my job is to fix our LIBORs everyday

the cash market is very liquid at the moment, but banks are simply choosing not to lend to each other.
mainly because they are having credit lines pulled, so they are simply not allowed to lend.
instead they just park it at the central banks and get a better rate, with less risk
no brainer really

inspector_monkfish

Thrugelmir wrote: »

Putting LIBOR rate linked mortgages aside to avoid confusion.

LIBOR is the inter bank and inter bank / BOE lending rate. Everyday the banks are required to balance their books. In simple terms some have surplus cash and some are overdrawn. Everyday 20 major banks are polled to see what they'll lend at. The top five and bottom 5 banks in the list are discarded ( ie highest / lowest rates). The remaining 10 are averaged, and that is the set LIBOR rate.

.

by the way, its 16 banks that contribute to BBA LIBOR.
the top 4 and bottom 4 (highest and lowest) are lopped off, then they take the average of the remaining middle 8 banks.

purch

LIBOR has no direct influence on mortgage rates

The purpose of LIBOR was to set a level playing field in Corporate/Commercial Business. Most of these contracts are set at LIBOR plus or minus whatever margin is agreed.

The way the word get's 'bandied' about nowadays makes you imagine it was only invented 10 minutes ago, whereas it has been an integral part of the Banking business for decades, but has virtually nothing to do with anything the general public come into contact with.

Thrugelmir

inspector_monkfish wrote: »

quite correct
but you did used to get some LIBOR linked mortgages not so long ago (or did i just dream that ? )


i actually work in the interbank markets (gbp cash trader)
part of my job is to fix our LIBORs everyday

the cash market is very liquid at the moment, but banks are simply choosing not to lend to each other.
mainly because they are having credit lines pulled, so they are simply not allowed to lend.
instead they just park it at the central banks and get a better rate, with less risk
no brainer really

LIBOR trackers were like BOE ( low interest rate) trackers a fad.

Is the cash liquidity due to QE?

From a mortgage exposure point of view, my view is that the banks are concerned. Larger businesses can recapitalise, reduce costs (staff) and slash capital expenditure. Property investors offloading property could yet be the catalyst for a further significant fall in property prices. Thereby affecting the whole market.

Thrugelmir

inspector_monkfish wrote: »

by the way, its 16 banks that contribute to BBA LIBOR.
the top 4 and bottom 4 (highest and lowest) are lopped off, then they take the average of the remaining middle 8 banks.

Thanks.

Less of them than there used to be. A dying species.

inspector_monkfish

Thrugelmir wrote: »

LIBOR trackers were like BOE ( low interest rate) trackers a fad.

Is the cash liquidity due to QE?

.

yes, pretty much
ironic that at the end of the day, it all ends up back at the BOE anyway !

i've just stashed 900mio quid with them
a year ago, i would have lent it to several other banks, but with a lack of credit lines, there is not alot of choice!!

inspector_monkfish

Here is a good example of just how long of cash all the Banks are in the InterBank Cash Market, and how they are simply not lending it to each other, or anyone else (even though they could if they really wanted)

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08:13 15May09 ECB SAYS 63 MLN EUROS BORROWED USING OVERNIGHT LOAN FACILITY, 15.921 BLN EUROS DEPOSITED

FRANKFURT, May 15 - The ECB said banks deposited 15.921 billion euros ($21.58 billion) overnight on May 14.

The ECB said banks also borrowed 63 million euros from its overnight lending facility.

The ECB narrowed the gap between its main policy rates to 75 basis points from 100 basis points from May 13.

The overnight lending rate is now 1.75 percent, from 2.25 percent, but the deposit rate remains at 0.25 percent. The ECB cut its main interest rate to 1 percent.

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15.9bln deposited
63mln borrowed

thats crazy!!