UK mortgage based on USDL

[simy]

Hi,

Wow, I haven't been around for a while, nice to see the community still growning at such a pace.

I know this is a little off subject so may not get any help but thought I'd try anyway.

I'm currently looking to remortgage (yes part of the 90% that haven't made any money! ), and I've been looking at a tracker mortgage, based in sterling but the interest rate is charged at 3-Month US Libor (USDL)+ 1.25%.

Opposed to some of the euro/us denominated mortgages this one carries no direct currency risk as it's in sterling but I'm not certain on how USDL is calculated? is it purely on US interest rate expectation or does it include some form of currency arbitrage between sterling/dollar?

Based on current 3m US libor at 1.25% it gives me a current payrate of 2.5%, much cheap than any standard UK mortgage. I've checked historical rates back to 1987 and US Libor has constantly been lower than BOE rate except for 2000 when it was fractionally higher.

I guess I'm trying to work out where the US is aheading.

Any views/guidance gratefully received!!!

 

[Trader333]

Would you mind saying who you mortgage is with ?



Paul

 

[simy]

Would you mind saying who you mortgage is with ?



Paul

Not at all Paul. There are 2 in fact, ones with Leeds & Holbeck the others with Skipton BS.

Further details on the skipton one can be found here:

http://www.skipton.co.uk/mortgages/products/stateside_tracker

The only major downside is the tie in period, if the mortgage is repaid before 31 May 2011 there will be an early redemption charge of 5% of capital repaid up to 31 May 2005, 5% up to 31 May 2006, 5% up to 31 May 2007, 4% up to 31 May 2008, 4% up to 31 May 2009, 3% up to 31 May 2010 and 3% up to 31 May 2011.

I suppose this makes it cristal ball territory, very difficult to establish if average US rate will be lower than UK over the next 6 years.

 

[Trader333]

Simy,

Thanks, this is useful information to have.


Paul

 

[simy]

I find this product really intriguing. Somewhere in this transaction the bank or some institutional investor has to be hedging the currency risk. Following on... if they're hedging the currency risk to offer US Libor rate then why not do the same based on the yen

JPY 0.047% http://www.bba.org.uk/content/1/c4/35/60/May04.xls

Must do some digging!