Property Investor News

As quoted in the title 3 month LIBOR (London InterBank Offered Rate) has recently dropped to below 1.3%. LIBOR is the benchmark used by banks to asses the cost of unsecured borrowing for a certain period of time across the money markets. The cost to banks of funds lent to borrowers over a more realistic mortgage term is however higher, currently a typical 2 year term costs 1.88%, 3 year 2.47% and 5 years 3.18%.

The buy-to-let sector began to mirror residential lending products over the last few years in terms of competition along with the number of products available, which previously stood at over 4000 in total. This created a mature market where pure supply and demand could dictate the price and increased supply outweighing demand, forcing costs down for the consumer.

The market reached a point where products became available at around 0.3% above Bank Base Rate (which today is currently 0.5%) for the life of the loan. Why then aren't there any products priced at 0.8% that can be purchased in today's market? Wouldn't this be fantastic for investors, but a look at the real cost of money over 3 years currently stands at 2.47% and will give you an insight to the answer.

Another major factor to take in to consideration is the current lack of product supply which has dramatically changed the buy-to-let market place. There is no longer a high level of competition for lenders to chase investor's business. The market has now adjusted with the reverse affect being felt which is demand for borrowing outstripping supply and enabling lenders to manage business levels by increasing their margins and costs. A lender will now typically increase the cost of its products until demand matches its appetite to lend. Any lender at the moment offering a market leading rate will soon find itself swamped with applications that it can't fund or offer a suitable level of service to.

The market is seeing a return of lender margins back to where they were in the earlier pre buy-to-let days of pure commercial borrowing with loans typically priced at 3% over LIBOR for a given term e.g. we are currently seeing a 3 year product at around 5.5%. This is much the same as what was on offer over a year ago when 3 month LIBOR was much higher. What this demonstrates is that the drop in LIBOR has been offset by the increase in lenders profit margins.

The pent up demand for buy-to-let mortgages is currently not allowing the cost of borrowing for consumers to reduce in proportion with LIBOR changes and this will only change in a free market when the supply tap is turned back on to match the demand, but that is another discussion altogether.

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