Higher Mortgage Rates, No Matter What

by Mark Johnston

What options are there if you want to take out a tracker mortgage? The choices, if
you don’t want to take out a fixed rate mortgage and want a variable rate mortgage
instead, are quite straight forward. There are two options within the variable / tracker
mortgages offered.

Traditionally the tracker or variable mortgage rates track the Bank of England base
rate. The Monetary Policy Committee meets every so often and decides whether the
economic movement and recovery warrants an increase or a decrease in the base rate.
The lenders will invariably add a few per cent on top. With the Bank of England
base rate sitting at 0.5 per cent, a record low and a continued low since 2008 (over 24
months), lenders may chose to add an additional 2.5 per cent and charge borrowers
3.0 per cent as a rate.

However, a survey recently highlighted the fact that specialist mortgage suppliers are
applying higher rates to borrowers on tracker mortgages. Why is this the case?

Well, the recent rise in the London Inter Bank Offer Rate (LIBOR) rate has a direct
impact on some mortgage rates applied to borrowers. The LIBOR is an interest rate,
used on a daily basis, at which banks borrow unsecured funds from one another in
the wholesale money market in London. Another way of looking at this can be to
imagine that this rate is the interest rate that the banks offer to pay each other for the
loans they borrow from each other for various different time periods and in various
different currencies.

Prior to the credit crisis, which reduced the general availability of loans (or credit),
over the last few years some mortgage lenders had been offering tracker rates
linked directly to the LIBOR. An odd notion but one that benefited the borrowers
significantly when this was lower than the Bank of England base rate at the time.

The LIBOR, in early 2009 was on the decline, meaning lower rates for borrowers
tracking this indicator. However, in the last year the LIBOR has increased
considerably and outstretched the current Bank of England base rate of 0.5 per cent.
The LIBOR currently sits at 0.8 per cent which makes this rate the less attractive of
the two tracker options.

The online company that provides customers with the best offers based on their
current circumstances, uSwitch.com, conducted a recent survey which remarked that
a massive 22 per cent of the UK population were concerned about the impending
rise in the Bank of England rate. This concern is founded in a general acceptance
by mortgage and industry experts that these rates will indeed be increased by the
Monetary Policy Committee within the next 18 months.

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