How the LIBOR rate affects mortgage repayments?

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How does the LIBOR rate affect mortgage repayments?

Many borrowers are unaware that the cost of their mortgage loans isn’t only anchored to bank of England base interest rate. Although interest rates have a major influence over the cost of mortgages, the level at which borrowers must repay their loans is also influenced by the LIBOR rate, and by swap rates.

What is the LIBOR?

The LIBOR rate officially stands for the London Interbank Offered Rate. This is the rate at which banks borrow money from each other, within the interbank market. The BBA LIBOR rate is compiled daily by the BBA and released by Reuters – this has a marked influence on short-term rates.

Who decides on the LIBOR rate?

The BBA (British Bankers Association), a board of advisers, and a reference panel decide the LIBOR. The team employ ‘spot fixing’ to make sure the rate is accurate and transparent. The LIBOR is a short-term, very sensitive rate. There is no way of forecasting the rate beyond a year.

How does the LIBOR rate influence the cost of mortgages?

If the LIBOR rate is consistently high, mortgage lenders will quickly adjust the cost of their mortgages to reflect this.

Why is the LIBOR more relevant than usual in the current mortgage climate?

Currently, although this is subject to change at any time, the LIBOR rate is substantially higher than the base rate. Although many mortgage borrowers are unaware of this, lenders monitor it constantly.

When the LIBOR is up, lenders face a shortage of money to fund competitive deals, and as a consequence up their rates. During periods when the LIBOR substantially exceeds base rate, it becomes more relevant as an indicator of mortgage cost.