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How Many Buy to Let Investors Are Aware What Their 'Reversion Rate' is?

In the UK, mortgage rates on new lending are influenced by a number of factors: the funding cost faced by lenders, their assessment of borrowers' credit risk and a variety of other factors including the lenders' operating costs and the mark-up which they charge.

Interest rate swaps are usually based on Libor and are a key component of banks' marginal funding costs for mortgages. If swap rates are higher, this is usually passed onto higher mortgage borrowing costs.

Capital Economics (CE) recently reported on whether the new capital requirements (from Basel III) would halt the fall in mortgage spreads (the amount of profit a mortgage lender makes on a loan). The firm reported: 'Excluding the few years prior to the financial crisis, when spreads looked unsustainably low, mortgage rates under the old regime had a spread over Bank Rate of around 100bps' (1%).

According to CE, there has been a steady decline in mortgage spreads from 2.7% in October 2014 down to 2.0% in May this year. However the firm adds: 'More stringent capital requirements on lenders will raise the cost of funding, which other things equal will be passed onto customers through higher mortgage interest rate spreads. But we estimate there is still scope for lenders to absorb at least the first 50bps increase in Bank Rate by lowering spreads.'

In summary, we might not see too much of an increase in fixed rate deals or variable rate deals even if the Bank of England (BoE) raises base rates from 0.5% to 1.0%. However, beyond that level any rise is likely to be passed straight onto borrowers.

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