I was up at the crack of dawn today for a quick comment on Wake Up To Money on BBC 5 Live, where the topic was the fact that LIBOR rates have now fallen substantially. 3 month LIBOR, which was so far out of kilter a few months ago and used as the main excuse behind lack of funds is now down at 0.75%, basically back to a “normal” level.
If this is the case, then why have rates not decreased?
For me Lenders at the moment are pricing based on three areas; cost, profit and fear.
The lenders main argument is around the actual cost of funds, and there is truth in their argument that it is not as simple as just looking at LIBOR or SWAP rates anymore. The traditional relationship between Lenders interest rates and Libor / Swap rates has changed completely and, although it still has a bearing, there are other factors in play.
For example, lenders pricing models now have a lot to do with Capital Adequacy requirements, which are defined as the ratio of a banks’ capital to its assets. In other words, regulators try to ensure that banks and other financial institutions have sufficient capital to keep them out of difficulty.
These Capital adequacy requirements have existed for a long time, but are getting tougher and more defined through European legislation such as Basel II, and this means in crude terms that the capital cost to lenders offering 90% is between 5 to 7 times more than offering say a 60% loan.
Actually the 60% LTV products are pretty competitive and tracker rates under 3% are available as well as, for example, 2 year fixes at 3.69%.
When we look at the 90% Loan-to-Value market we see some eye-watering offering from lenders such as Abbey and Halifax with products that start with a 7 !
Lenders do have difficulty here, as on the one hand they are asked to lend more but on the other hand legislation, which is rightly asking them to price for risk, is tying up more of their capital and making it more expensive to do so.
The second reason is profits which no matter what their protestations to the contrary, lenders are taking this opportunity to repair their balance sheets and increase their profit margins. Let’s face it, we need lenders to do this to a certain extent as weak banks are no good to anyone as we have found out, but this still feels like a massive kick in the teeth to consumers who helps to stabilise these institutions. I also do believe that they could do more to assist customers, but with a distinct lack of competition driving down rates there seems little to force them to do so.
The third issue is around fear. The fear of a lender sticking their head above the parapet and being overwhelmed with applications which they cannot cope with or have the funds to meet. Demand is still there and growing all the time, particularly at the top end of the market which will begin to trickle down over time, and the last thing any lender wants is to be inundated so that their service levels disintegrate.
So although LIBOR, and indeed SWAP rates have dropped slightly, this combination of factors means that I would not expect a swift reduction in rates by the major lenders. Although you will continue to see lenders dipping in, drinking their fill and then ducking out again from time to time.
It is getting more difficult to keep up to date with the different product offerings as they are often pulled as quickly as they are introduced and I expect this to continue for some time yet.