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Libor low sparks mortgage hopes

Lenders start to cut rates

Mortgage rates have been cut by major lenders as 3-month Libor continues to fall. HSBC, Woolwich and Cheltenham & Gloucester have all reduced the cost of borrowing – with HSBC offering a market-beating 1.99% 2-year deal.  

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The London Interbank Offered Rate (Libor) is the rate of interest at which banks borrow funds from each other in London. Historically, it is closely pegged to Bank of England base rate. At the start of the ‘credit crunch’ in 2007 it rose sharply however and has taken almost two years to stabilize. The gap between base rate and 3-month sterling libor made headlines as successive cuts by the Bank of England seemed to have little immediate impact on the cost of borrowing. Mortgage lenders took their lead from the interbank rate, and for as long as this remained high there was little prospect of mortgage rates falling.

Quantitative easing

The pressure from Libor continued throughout much of 2008 but was eventually eased as the government pumped money into the economy to encourage more lending. On 5 March 2009, Bank of England base rate was cut to an all-time low of 0.5%. The gap between this and 3-month Libor was as high as 1.15% but gradually began to fall. By June it had narrowed to 0.68% and this month it is just 0.175%, with Libor at a new low of 0.675%.

Mortgage moves

Although mortgage rates fell during 2008-9, they seemed to have stopped falling while Libor continued its downward spiral. This was ascribed to lenders’ worry about increased risk and the need to rebuild capital after the banking crash. Three lenders have now announced rate cuts, however, with HSBC offering a 2-year variable rate of 1.99% to new borrowers, Woolwich cutting the cost of a 2-year fixed rate deal from 4.29% to 4.09% and Cheltenham & Gloucester reducing the cost of its intermediary-arranged fixed rate mortgages by 0.1-0.2%. For more details see our HSBC news story.

Commenting on the reduced rates, Which? mortgage expert Cathy Neal said: ‘A cut in rates is welcome news for borrowers, but the HSBC deal is only available for those with a 40% deposit and charges an arrangement fee of £1,199. First-time buyers and those who need to borrow more will still find lending tight.’ 

To check mortgage rates and find the best deal for you, use the Which? Mortgage finder. It searches the whole of the market and allows you to compare different types of loan.

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