How Libor has changed

by Ed Bowsher on 28 September 2009  |  0 comments
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Rates on variable mortgages used to be closely linked to Libor, but things have changed since the credit crunch.

Ray Boulger has written an excellent blog post on the relationship between Libor and mortgage rates. Rates on variable mortgages used to be closely linked to Libor but Ray brilliantly explains how that has changed.

I also very much agree with his point about the spread between high and low LTV (loan-to-value) mortgages. It used to be the case that someone with a 10% deposit (a 90% LTV) wouldn't have to pay a dramatically higher rate than someone with a 40% deposit. Thanks to the credit crunch, 60% LTV mortgages are much more attractive than 90% LTV mortgages. But the crucial point is that the spread between 60 and 90% probably won't narrow back to the levels we saw in 2007. That's because the Basel 2 capital rules - which were introduced in January 2008 - make a 90% mortgage more expensive for a bank so even in good times banks will want to charge a relatively high rate for borrowers with small deposits.

> Ray Boulger's blog