Charcol reduces rate on Federal Reserve Mortgage

This is a tracker mortgage based on the lower US short term interest rates but without any currency risk whatsoever because all borrowing is in sterling.

The initial rate is 2.50% to 31/03/04, after which the mortgage will track US$ 3 month Libor plus a margin of 0.99% for 10 years from that date. US$ 3 month Libor is currently 1.17%*, indicating a pay rate of 2.16%, even lower than the initial rate. The tracker rate will be re-set every 3 months.

Interest on this mortgage is calculated on a daily interest basis and the mortgage is flexible - borrowers can repay penalty free up to 5% p.a. of the mortgage and any such overpayments can be utilised to allow up to 6 months payment holidays per year if required.

Commenting on the deal, Ray Boulger of Charcol said, “With one UK rate increase already, and further increases likely next year, most borrowers on UK linked variable rate mortgages will see their monthly payments increase in December. US rates are also likely to increase next year, but are expected to remain well below UK rates. Hence we expect this mortgage to continue to be cheaper than tracker mortgages based on UK rates for a considerable time and of course it will not be subject to future UK interest rate changes.

“The key aspect to evaluating this mortgage is what the difference is likely to be between short term US and UK interest rates over the term of the deal. US$ 3 month Libor has been lower than its UK equivalent for all but 1? of the last 15 years and it is currently over 2% lower. For this deal to become uncompetitive, the average differential between short term UK and US interest rates over the next ten years would have to narrow by over 2%. Although the current differential between US and UK rates is likely to reduce over time this deal nevertheless offers exceptional value for borrowers who choose a variable rate and are prepared to accept redemption penalties for 10 years in exchange for a very competitive rate.

“Furthermore, such a low starting rate has the added benefit that on repayment mortgages the amount of capital repaid in the early years will be much greater than normal. This will be a real benefit when interest rates increase, as the outstanding mortgage will be lower. An extra bonus with this mortgage is that because the rate is so low borrowers will have the option of paying their mortgage back much quicker than usual, simply by paying each month what they would have paid on a normal mortgage. They can either set the mortgage up for a shorter term, use the 5% p.a. penalty free overpayment facility, or employ a combination of both.“


* US$ 3 month Libor rate is currently 1.17% and UK£ 3 month Libor is 3.98%. The Libor review dates for this mortgage are 1st April, 1st July, 1st October and 1st January.

What is the Libor rate? - BBA Libor is the British Bankers’ Association fixing of the London Inter-Bank Offered Rate. It is based on offered inter-bank deposit rates contributed in accordance with the

Borrowers paying a rate of 2.50% would repay £2,056 more off the capital of their loan after five years than a borrower paying a rate of 3.75%; over ten years this increases to £3,419. This is based on a £100,000 repayment mortgage for 25 years, and assuming rates remain the same during the term of the loan.