If you hadn’t heard of LIBOR at the start of last week, chances are that you have by now. MPs are grilling former banking boss Bob Diamond as I type!
This key interest rate is a measure of how much it would cost banks to borrow from each other. It is used as a benchmark interest rate for trillions of pounds of financial transactions around the world, and last week the FSA fined Barclays for attempting to manipulate it.
Mortgage interest rates can be influenced by LIBOR, and yesterday the press were quick to seize on a statement by the Housing Minister Grant Shapps which suggested that Barclays’ actions may have led to a higher rate of repossessions.
His precise statement was that:
‘all the research into homelessness proves that there are a lot of different causes, of which the LIBOR rate may have [been] a contributory factor, if indeed it transpires that mortgage rates have been adjusted as a result.’
Now, there’s a big ‘if’ in that statement. The nature of how LIBOR is calculated makes it very difficult for one bank acting alone to significantly influence the reported rate – at least to a level that would affect mortgage holders – and only a handful of specialist lenders offer mortgages where the rate is specifically pegged to LIBOR rather than another type of rate (like a fixed rate deal or a tracker that follows Bank of England base rates).
For customers on Standard Variable Rate mortgages, it’s possible that changes in LIBOR would have affected the amount of interest they pay. However, in these cases it would be almost impossible to disentangle the various factors at play and point to LIBOR manipulation as the single reason for a given rise or fall in interest rates.
Even if it were possible, before 2007 traders most likely exploited small fluctuations in the LIBOR rate, which would have been unlikely to have much effect on homeowners, and after 2007 Barclays kept its LIBOR submission artificially low, so if there was an impact on mortgage rates it would have been a downwards one.
While the manipulation of such an important interest rate is incredibly serious, the link to possible repossessions is remote and could take the focus from the real issues facing homeowners today.
Last year in the United Kingdom there were more than 37,000 repossessions. While this is lower than the peak in 2009, repossessions remain more than 40% higher than their pre-crisis level, and this is despite the fact that the base rate of interest remains at an historic low.
The main challenge facing many homeowners today continues to be over-stretched incomes that are failing to keep pace with the cost of housing, an all too common scenario that tragically for some ends in the loss of their home.
As always, whatever the cause of mortgage difficulties, Shelter’s advice to anyone at risk of arrears is to seek advice as early as possible.