What is Barclays Bank Base Rate?

savemoney

My mortgage company First direct says the BBR is the same as BOE base rate

MarkyMarkD

matt83uk wrote: »

Really trying to get my head round your post but struggling, any chance you could elaborate?

You say 5% on the swap - What is the swap figure?

Thanks

No problem.

You buy a mortgage from the bank and agree to pay them 4.95%.

They enter into a swap, whereby they pay another bank 5%, and receive LIBOR (which is reset every month or three months).

So, overall your bank is receiving LIBOR + 4.95% (from you) - 5% (to the other bank = net LIBOR - 0.05%.

By entering into the swap agreement they've turned a fixed rate income (from you) into a variable rate income. Which is what they want, because most of the people they get money from - either savers, or other people who lend them money - want a variable rate.

House_seller_2008

MarkyMarkD wrote: »

What you are stating here is a common, but entirely wrong, misunderstanding of how banks fund mortgages.

If you borrow at a fixed rate from a bank, they enter into an interest rate swap contract with another party (probably another bank), under which they pay a fixed rate, and receive LIBOR.

So, overall, the rate that the bank receives from your fixed rate mortgage is LIBOR +/- the margin between the swap rate and the fixed rate you pay.

E.g. fixed rate 4.95%; swap rate 5%; LIBOR 4.3%

Bank receives 4.95%, pays 5% on the swap and receives 4.3%. Overall, they receive 4.25%.

If LIBOR falls by 1%, they continue to pay 5% on the swap and just receive 3.3%. Their income falls by the same amount that LIBOR falls.


If banks operated the way you suggest they operated, they would go bust. Banks cannot possibly cope with the sort of interest rate risk which would result if they didn't hedge out their fixed rate mortgage exposures. Building societies are no different.


The one slightly relevant point I can draw from your misunderstanding (and my response) is that lenders who have mainly fixed rate mortgages on their books have benefited from the high rate of LIBOR, compared to BBR, as they are receiving LIBOR on much of their assets and hence better off. Those who have mainly tracker rate mortgages haven't experienced this benefit.

So, from what you are saying, if the interest rates went up to 20%, the banks would be in an even bigger win win situation as they would gain on both trackers and fixed rate deals!?

matt83uk

Mark,

So say I enter a fixed rate mortgage deal with a rate of 4.95% which lets say for XXXk quotes to £300 per month from me to Imagine Bank.

Imagine Bank pay Swap-Partner bank 5% which say equares to £315 per month?

Swap partner pays Imagine Bank LIBOR say at the moment its less than swap rate? So Imagine Bank makes a loss at this stage?

If LIBOR rises then Swap Partner bank essentially pays Imagine Bank?

Where doe sthe 0.05% come into it?

MarkyMarkD

House_seller_2008 wrote: »

So, from what you are saying, if the interest rates went up to 20%, the banks would be in an even bigger win win situation as they would gain on both trackers and fixed rate deals!?

No, not at all.

They would earn a higher rate of interest on both types of deals.

But they'd have to pay a higher rate of interest on their funds (savings accounts or wholesale borrowings).

If the BBR/LIBOR margin stayed the same, and the average savings/BBR margin remained the same, then they would be neither better nor worse off.

MarkyMarkD

matt83uk wrote: »

Mark,

So say I enter a fixed rate mortgage deal with a rate of 4.95% which lets say for XXXk quotes to £300 per month from me to Imagine Bank.

Imagine Bank pay Swap-Partner bank 5% which say equares to £315 per month?

Yes.

Swap partner pays Imagine Bank LIBOR say at the moment its less than swap rate? So Imagine Bank makes a loss at this stage?

Yes, in theory. But they probably in turn pay the fixed rate on to someone else.

If LIBOR rises then Swap Partner bank essentially pays Imagine Bank?

Yes, absolutely.

Where doe sthe 0.05% come into it?

The 0.05% is the margin between the fixed rate on the swap, and the fixed rate paid by the borrower to the first bank. The swap locks in that negative margin of 0.05% for the first bank - hence giving them a fixed margin to LIBOR of -0.05%.

oxuser

I've had a Barclays/Woolwich tracker mortgage since 2001. I was originally concerned that the BBBR might deviate from the BOE rate if things got bad, but the sales representative reassured me that it would always track it. It always has, even through the recent drama. There must be some legal reason for the distinction, but it doesn't seem to make any difference in practice.

lorsim

http://www.personal.barclays.co.uk/BRC1/jsp/brccontrol?site=pfs&task=popup1group&value=15396

payless

recently ( today ?) changed website- suggest you look at http://forums.moneysavingexpert.com/showthread.html?t=1335595

House_seller_2008

Just like it says on the website, it follows the BofE base rate.