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Banks Forced to Lose Money by the Chancellor

8th November 2008 | back to article listings BACK    print this article PRINT

A completely unreported effect of the Chancellor's demands that banks pass on the full 1.5% base rate drop on their standard variable rate mortgages is that banks will be losing money.

50% of all mortgages are fixed rate, 40% are trackers linked to the bank base rate by a margin but 10% of mortgages are on standard variable rate and many of these have now dropped on Friday to around 5% which is a great rate. Unfortunately, as banks fund significantly from interbank lending (LIBOR) and interbank lending rates only dropped around 1% last week banks have just lost 0.5% margin on standard variable rate mortgages until such time as LIBOR drops the full 1.5%. Banks will need to lend more to each other in order to achieve this. Does this mean banks will be effectively pushed once more in the direction of lending more freely to each other, hence bringing down LIBOR rates. Quite possibly.

What's the result? If LIBOR rates don't come down as a result of banks trusting each other more and lending each other money this base rate drop will end up costing them dear. I wonder if that was the intended outcome as if so it was quite clever thinking by the government or their advisers at least. I was the Prime Minister right now I'd be thinking about an election as people longer term memories of the government's incompetence are probably outweighed right now by their short term reaction to some big, and quite correct, vote winning decisions.

This news story has come from the property investment blog by Stuart Law, CEO Assetz plc.

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