November 23, 2011 by Michael Oakes
(Source: Bloomberg)
It was only a matter of time before the direct effects of the Eurozone crisis were felt on the ground in the UK. Over the past 3 months the rate at which banks lend to each other has increased significantly. The 3 month Sterling LIBOR (London Interbank Offered Rate) has risen to a two year high of more than 1%, making their cost of borrowing much more expensive.
Back in August, LIBOR stood at 0.83%; closer to the long term ‘typical’ rate of 10 to 20 basis points above the Bank of England Base Rate. But the steady rise since then shows that confidence between the banks is wavering and in the past couple of weeks, we’ve seen banks start to pass on their increased cost to mortgage customers.
Since the beginning of November, we’ve seen new mortgage products being launched with higher rates – not just tracker products (whose rates typically follow LIBOR) but also new fixed rate mortgage products too – and from the big banking groups, not just smaller lenders operating on tighter margins. Santander, Halifax and Woolwich (part of Barclays) have all launched new products with higher pay rates.
Worryingly for borrowers, there is also increasing pressure on Standard Variable Rates (SVR). In November, the Bank of Scotland and TMB (part of the Lloyds Banking Group) have both raised SVR from 4.84% to 4.95% and SVR is typically far higher than the headline grabbing Base Rate – for example the Mortgage Trust (Paragon) SVR is 5.1% and even the high street lenders’ variable rates are currently surprisingly high: Northern Rock’s SVR is, 4.79% and Natwest is 4%. Others are set to follow suit with rate rises unless confidence quickly returns and LIBOR begins to fall.
It’s worth remembering that a bank can change its SVR at any time as it’s not linked to the Bank of England Base Rate, which is expected to remain static for the next 12 to 18 months. Around 40% of properties are currently on SVR mortgages, so a widespread hike in SVR would have a dramatic impact on the economy by reducing consumers’ spending power.
