Major mortgage lenders raise lending rates as further crises hit the financial sector
Article source: www.news.bbc.co.uk
The global financial crisis has led to increasing reluctance from banks to lend to each other. The inter bank lending crisis comes after much turmoil within financial institutions including Lehman Brothers, Fannie Mae, Freddie Mac and the Insurer AIG in the United States; as well as Northern Rock, HBOS and Bradford and Bingley (B&B) in the UK. The reluctance of the banks to lend to each other has led to an inflated LIBOR (London Inter Bank Offer Rate). Unusually, also, there is a huge difference between the overnight lending rate and the 3 month LIBOR; the 3 month LIBOR is significantly higher which indicates that the banks are unwilling to lend to each other for longer periods of time, and if they do, they want a higher slice of the pie in return.
This in turn has pushed up the interest rate at which banks are prepared to lend to their customers.
The banks are also becoming more cautious with regards to the types of customers they are lending to. As they are borrowing at higher rates from other banks, and particularly in this climate, they are looking for lower risk clients to help stabilise their future.
First Direct, the HSBC subsidiary, the Woolwich, the mortgage arm of the Barclays, and HSBC’s new rates were put in place on Friday. Other mortgage lenders are reviewing their rates and will, most likely, follow suit soon.
What about First Direct’s fixed rate deal?
First Direct, the subsidiary of HSBC, will raise its two year fixed by 0.2 of a percent point.
What about HSBC’s deal?
New borrowers with HSBC, who have a 10 percent deposit to hand, will be offered a 2 year fixed deal at 6.28%, up 0.3 of a percentage point.
A typical £150K mortgage will cost over £300 more per year for those houses buyers with the required deposit; those without the 10 percent upfront will be charged a higher lending rate.
Safer borrowers, those with a 25 percent or more deposit, are being enticed by HSBC with a 0.2 percent saving on the cost of their current two year fixed rate deal. This equates to a saving of just over a £200 per year on the same mortgage.
And the Woolwich?
And the Woolwich tops the bill with a lending rate rise of 0.35 of a percentage point.
What about the others?
Undoubtedly, as the LIBOR remains high, the cost of these additional interest charges will have to be passed on to the individual lender’s customers. The Yorkshire raised its rates on Monday, whilst unusually Abbey plans to cut its rates for customers with a 15% deposit on Friday.
Aaron Strutt, of mortgage brokers Chase De Vere, commented. "I think the majority of lenders are looking at the pricing of their mortgages.” This will undoubtedly lead to a lot of changes in the rates at which banks lend to their customers.
Unlike the others, Britannia reduced its rates; however this is likely to be an exception.
The London Inter-Bank Offer Rate (LIBOR)
This is the lending rate at which banks lend money to each other. The two common variations are either referred to as an overnight rate, or a 3 month LIBOR rate. The problem with the 3 month LIBOR rate is that it is exceptionally high; the current rate is at its highest level for 9 months, peaking well above 6 percent.
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