The product is a fix and track mortgage based on the lower US short term interest rates but all borrowing is in sterling to cut out currency risk.
After the fixed rate period the mortgage then track US 3 months LIBOR with a margin of 1.2 per cent for five years. The US 3 month LIBOR is currently 1.9 per cent, which would give a pay rate of 3.1 per cent.
Ray Boulger, senior tchnical manager at Charcol, said, "The key to evaluating this mortgage is to consider what the average differential is likely to be between short term US and UK interest rates over the 5 years of the deal. The cheapest normal UK tracker mortgage for five years is at Bank Base + 0.7 per cent, i.e. a current pay rate of 4.7 per cent. The initial indicated tracker rate for the Federal Reserve Mortgage, based on today’s LIBOR rate, is 1.6 per cent lower than this at 3.1 per cent. Thus the current differential between short term UK and US interest rates would have to narrow by as much as 1.6 per cent for this mortgage to become uncompetitive.
"Both UK and US rates are likely to rise from current levels later this year and the differential between UK and US rates is expected to narrow. However, this mortgage initially offers an exceptionally competitive starting rate of 2.99 per cent and the subsequent margin of 1.2 per cent over US 3 month LIBOR until january 2008 would produce a current pay rate only slightly higher at 3.1 per cent, a much cheaper rate than most US mortgage borrowers pay."
