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If Interest Rates Rise To, Say, 5%...

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Had this discussion with a friend recently - if / when rates rise substantially, will banks raise their lending rates with the same margins they operate at now?

Can we really expect to see, with base rates at 5%, the average (80% LTV) mortgage going for 8-9%?

I don't know of any tracker at the moment less than 2.3% above base, and that's with a 40% deposit. Most seem to operate at around 4% above base.

This would obviously mean carnage for the market - well before rates got to 5%, too...

Your thoughts?

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Margins should subside a bit over time. As banks balance sheets mend they need less profits simply to offset the bad debts before they think about making a profit. As they mend, they can lend more and that means more competition whittling away margins.

They will not go down to pre crisis levels as those levels structurally underestimated the long term cost of risk. Plus there are less banks and you may get more oligopolistic pricing.

Of course the timing and size of margin falls may mean little in terms of offsetting interest rate rises, like giving someone faced with a tsunami a pair of flippers.

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differential to base rate is not the same as margin on funding cost

Had this discussion with a friend recently - if / when rates rise substantially, will banks raise their lending rates with the same margins they operate at now?

Can we really expect to see, with base rates at 5%, the average (80% LTV) mortgage going for 8-9%?

I don't know of any tracker at the moment less than 2.3% above base, and that's with a 40% deposit. Most seem to operate at around 4% above base.

This would obviously mean carnage for the market - well before rates got to 5%, too...

Your thoughts?

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differential to base rate is not the same as margin on funding cost

+1

I expect the spread of libor to base to shrink as rates rise due to market competition but I doubt we will get back to the pre-crisis levels for many years, if at all.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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