UK Property Investment Blog

The interest rate at which banks lend money to one another has fallen to a record low.

Across the US and the UK, mortgage officials have witnessed significant drops in their Libor rates, signaling what they believe to be a positive turn in the lending market.

How does this affect mortgages?

More than you think.

The Libor rate (the London Interbank Offered Rate) helps determine the cost of mortgages, business loans and general household loans, so any fluctuations – up or down – will affect how much banks are willing to lend.

When the financial crisis first hit, the Libor rate shot up as banks perceived lending to one another to be riskier.

However, during the last 3 months, the lending market has taken a turn for the better. Why? Because the Libor rate has dropped to 0.66% in the US and 1.3% in the UK.

With such significant drops in place, better mortgage deals are now appearing on the market.

Why has this happened?

With the government implementing a range of different actions to help get banks lending again, these various acts have helped to bring the Libor rate down. Yet despite this positive move, the Libor rate still has some way to fall before it reaches the same rates it was prior to the credit crisis.

Before the recession, this rate was only a few tenths above the Bank of England’s base rate – which in the current climate is only 0.5%.

Compare this to the above figure of 1.30%, and the Libor rate still has a substantial way to go before it properly collates with the Bank of England’s existing base rate.

How can this information affect you?

Simple. Like any homeowner you are looking for the best mortgage deals for your rental properties, so the better interbank lending is, the more promising their mortgage options will become.

Yet you don’t have to wait for the Libor rate to catch up with the Bank of England to successfully invest.

For those of you who have never heard of ‘Drop Lock’ mortgages before, these clever little mortgage deals could be the key to offering your property portfolio affordable monthly repayments.

Essentially they are just tracker mortgages which allow you to switch – without penalties – to a fixed rate loan and ‘lock-in’ those repayments before interest base rates rise again.

What’s the catch?

There doesn’t appear to be one.

Whilst the base rate may currently be at 0.5% – making most tracker deals worth 3% – this figure IS subject to change. Give it 6 months or a year and this figure could rise to 4% making your monthly repayments higher than most fixed loans.

However, by adopting this ‘Drop Lock’ deal you can swap out of your tracker deal onto a fixed rate loan at any point you want and prevent your repayments from rising for an agreed period of time.

Where can I find these Drop Lock mortgages?

Luckily all the leading lenders appear to be jumping on board with this idea, offering 2, 3 or 5 fixed rate deals as part of their Drop Lock products.

Yet the best part has to be their added bonuses. Offering the deliciously tempting choice of not having to incur an Early Repayment Charge or Redemption penalty; choosing to do this deal could potentially save you a lot of money on your monthly repayments.

The HSBC for example are offering a highly competitive tracker deal of just 2.98% – at least 0.3% lower than most current tracker deals.

And although they are not openly advertising it as a Drop Lock deal, HSBC are still offering homeowners the freedom to switch to a fixed rate loan without incurring charges at any point in their contract.

Bank of Scotland, Northern Rock and Royal Bank of Scotland are all beginning to re-enter the buy to let market which can only be a good thing for buy to let investors!

Alongside Birmingham Midshires, who are getting offers out as quickly as ever and the Mortgage Works and C & G this will offer a very good range of lenders.

An interesting point from David Smith in the Sunday Times at the weekend, who stated that actual lending by many lenders was still quite constrained last year – with the average first time buyer earning an average of £35,600 in summer 2007 and the average salary of a mover being £45,600 compared with less than £25,000 for the population as a whole.

So the median loan-income ratio for first time buyers was less than 3.4 and for movers just over 3 which supports average prices of £180-200,000.

Clearly still people on the average salary of say £25,000 would struggle to get finance while prices were this high, and it would be irresponsible for lenders to lend at this level.

The days of 125% mortgages are clearly, quite rightly gone, but it does look as if with some tightening up across the board the lenders will be back lending confidently again. The key for them is making sure values are sensible, and most importantly the debt serviceability is realistic ie on buy to lets at least a rental coverage of 125% (we normally go for at least 150%) and for owner occupiers probably looking at no more than 3.5-4 times annual earnings.

All in all though, good news for buy to let investors with more of the big players coming back on to the market and looking to lend again!