Hope for homeowners as Libor falls 1%

Mortgage lenders have been ordered to pass on to customers yesterday’s 1.5% cut in the Bank of England’s base rate, to 3%.

Chancellor of the Exchequer, Alistair Darling, called leading lenders to a meeting early today and Prime Minister Gordon Brown is backing up the Treasury’s actions by stating that the Government is determined to get banks to resume lending.

The UK’s mortgage providers and their representative body, the Council of Mortgage Lenders, have been arguing that the cost of a home loan is determined by inter-bank borrowing rates and not the Bank’s base rate.

However, yesterday’s shock reduction in the base rate has already impacted on sterling three-month Libor, a rate crucial to the UK mortgage market, which has today fallen from 5.56% to 4.49%.

While the rate is still 1.49% above the base rate, the speed at which three-month Libor fell is cause for hope.

Prior to the credit crisis, Libor tracked 15 or 20 basis points above the base rate but last summer banks became reluctant to lend to one another, nervous of which would be the next to write down billions in relation to the US sub-prime mortgage crisis.

Libor then soared, leaving its relationship with the base rate behind.

Today’s fall is seen as a breakthrough and if Libor continues to decline next week, homeowners with tracker deals and on lenders’ standard variable rates (SVR) may at last see their mortgage repayments substantially reduced.

So far only Lloyds TSB and Abbey have promised to pass on the full 1.5% base rate cut to their tracker and SVR customers.

Of course, borrowers with base rate tracker deals with any lender should automatically benefit from the full reduction.

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