LIBOR rate question

Hi Rob

LIBOR generally predicts what the Bank of England base rate will be over the next three months, plus a bit of a margin. Therefore, assuming the banks don't maniplulate the LIBOR rate, it will generally be slightly higher than the base rate when the chances of a rise are low, much higher than the base rate when a rise is expected imminently and could even be lower than the base rate if the base rate is predicted to fall.

I wouldn't be too concerned about rates rising next year tough, I very much doubt they will. As always though, it's best to plan for the worst and hope for the best 🙂
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When the Bank Base rate first fell to 0.5% it took a few years for LIBOR to catch up because the banks were not capitalised enough and not keen to lend to each other. The differential was 2% plus at one point. They have settled down now though with some lenders quoting their 3 month LIBOR from 0.53% to 0.6%.

I would be more worried about Interest rates not moving at all as it will be a sign that the recovery is stalling.

Thanks for explanation it's now clear, although I think interest rates not moving from there current 0.5% is great news for a lot of investors in terms of monthly profits even if it does mean the economy is stalling. Me for one )

Rob, I would endorse what has already been said above, and just to add that in the "old days" pre credit crunch, there was hardly any difference between LIBOR and BoE base rate, just a few base points, despite having no formal link between them. It is a relief, as a mortgage broker, to get back to those stable conditions. If however, you want to plan for the worst case scenario, there are some pretty reasonable 5 year fixed rates around.

Reply to the comment left by "John Constant" at "03/06/2014 - 08:21":

Good point John.

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In real terms for the borrower, if LIBOR is effectively an exaggerated base rate (either way, up or down) are there any benefits of being on a LIBOR linked facility? And is it always advisable to opt for a base rate linked facility rather than LIBOR?

Thanks in advance.

Andrew

Reply to the comment left by "Andrew H" at "03/06/2014 - 08:41":

Great question.

In my experience, LIBOR has always been fractionally higher than the BoE base rate. Most lenders don't give you a choice between the two though and other factors such as margin, fees, criteria etc. have to be taken into consideration. Therefore, you can't really say that one is better than the other across the board.

In my opinion though, both LIBOR and BoE linked trackers are far more safe than a lenders SVR. I don't likes deals where a lender sets interest rates according to "market forces". The risk with SVR's is that if a lender wants/needs to exit from a certain niche they could simply increase their SVR. Without the transparency and links to a rate which is set independently I think SVR's present a much higher risk to borrowers.
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Reply to the comment left by "Mark Alexander" at "03/06/2014 - 09:05":

Many thanks Mark - great advice.

Reply to the comment left by "Mark Alexander" at "02/06/2014 - 15:27":

Hi Mark, You are hopefully right that interest rates will stay as they are for some time to come or at least not move by much. I would be more worried by the lenders all eagerly awaiting the outcome of the Bank of Ireland and the West Brom increases to see if they too can get away with increasing their tracker rates to existing customers. I do get fed up with people saying how I should be pleased I have had low rates for a long time and should, basically keep quiet and stop moaning about increases. But if there hadn't been low rates I wonder how many extra homes would have come available for letting?

With the ECB having just dropped its interest rate from 0,25% to 0.15%, I'm thinking that has reduced the chance of a rise in base rate happening soon.