LIBOR versus the base rate

By December 6, 2008Articles

2% Base Rate versus the LIBOR. What makes the banks lend?

What is the LIBOR?

London Inter-Bank Offer Rate. It is the interest rate that the banks charge each other for loans. This rate is applicable to the short-term international interbank market, and applies to very large loans borrowed form anywhere from one day to five years.

A bank with liquidity requirements can borrow quickly from other banks with surpluses. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day.

We have outlined the change in the LIBOR over the past month.

Libor:           04-Dec    03-Dec    02-Dec    1 Week ago    1 Month Ago
Overnight    3.000%    3.000%      3.006%     2.994%           4.503%
1 Month       3.239%    3.310%      3.351%     3.301%           5.439%
3 Months     3.791% 3.840%      3.881%     3.946%           5.680%

One month ago the 3 month LIBOR rate was at 5.68% and now it is over 2% less than that rate, currently at 3.79%. So the interest rate the banks pay for borrowing from each other has decreased by approximately 33% in a month! This is of course to the drastic base rate cuts down to 3.00% and now 2.00%. We should then in theory start to see new mortgage interest rates fall quite quickly as history shows normal mortgage rates sit maybe .5% to around 1.5% above the base rate depending on the LTV and borrower.

The problem is liquidity though this time round the banks simply do not have much cash and therfore like to hoard it and only lend out at high interest rates and low LTV’s.

When do you think the average 85% LTV mortgage will return at a rate below 5%?

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