Tracking the Best Home Loans (Why Rates Go Up, When Rates are Cut)

Many mortgage analysts are currently recommending purchasing a tracker mortgage However, although trackers may be a good option, you would be advised to move quickly to secure a good value tracker.

For example, last week Halifax increased its tracker rate by 0.2%, despite the base rate cut by the Bank of England. This seems rather counter intuitive but actually reflects the detoriorating conditions in the capital markets that help finance mortgage lending. The Halifax tracker offered very good value and they were overwhelmed by people wishing to take out the product.

Why Can Mortgage Rates increase when Bank of England Base Rates are Cut?

The Bank of England base rate is a guide for the rest of the economy. But, it is by no means the only interest rate in the economy. Another important rate is the three month LIBOR interbank rate. This is important because it is the rate at which banks borrow from each other. This is important during periods of liquidity shortages. If LIBOR rates increase, the banks will have to increase their commercial interest rates.

The reason that the interbank rate and tracker rates are increasing is strongly related to the subprime crisis. In the US there were many mortgage defaults, resulting in many financial institutions (including UK ones) having to write off substantial losses. Because of the losses from mortgage lending, financial institutions are currently very wary of taking on more mortgage debt, (even if it offers reasonable security and low risk)

Liquidity Squeeze. This is known as the difficult of gaining finance due to the factors mentioned above. Because liquidity is in short supply, the cost of borrowing has risen. Banks want a better profit margin in return for their perceived increased risk.

In the past many tracker mortgages offered a rate below the base rate. But, now they offer a rate above the base rate.

Example

Lloyds TSB Tracker Mortgage. At the beginning of December, the tracker rate was the base rate plus 0.36%. (6.11) Now the same interest only mortgage is the base rate plus 1.09. Therefore although the base rate has fallen the tracker rate has increased for prospective customers. (note once you have taken out the mortgage, the tracker rate is fixed) This means that for a £100,000 mortgage the monthly cost has increased from £509 to £528. If the tracker (1)

The Bank of England is aware of this issue and made the point recently that the profit margin on bank’s lending was very low. Therefore, it is hardly surprising that with the liquidity squeeze banks are seeking to increase their margin.

(1) Source Sunday Telegraph, 17th February 2008

However, with some predicting lower interest rates in the coming 12 months, a tracker mortgage can still offer good value in the medium term.

• Tracker Mortgages offer Best Deal