LIBOR Linked Mortgages
What are LIBOR linked mortgages?
Like standard variable rate mortgages, LIBOR linked mortgages track an interest rate, but instead of following the Bank of England’s base lending rate which is decided at monthly meetings of the Bank’s monetary policy committee, as standard variable mortgages do, LIBOR linked mortgages track the London Inter Bank Rate.
This is the rate at which banks buy and sell money to each other in the money markets. LIBOR linked mortgages will be charged at a given margin over the interbank rate (typically 1 to 1.5%) and is likely to be reset quarterly. LIBOR linked mortgages are normally provided by mortgage lenders who specialise in arranging self-certification mortgages and subprime mortgages.
Benefits to LIBOR linked mortgages
The main benefit of LIBOR linked mortgages is that it provides the customer with the opportunity to pay a rate closer to the true cost of money. In a low interest rate environment LIBOR mortgages are likely to result in lower overall payments. Also, the LIBOR interest rate is decided every three months instead of every month for the base lending and this provides slightly more stability than a standard variable rate mortgage would provide and makes it a little easier to plan your finances.
Disadvantages to LIBOR Linked Mortgages
One of the disadvantages is that during periods of high interest rates the repayments are likely to be higher than those for standard variable rate mortgages.
Summary
LIBOR linked mortgages are very different to standard variable rate mortgages in that they track the London Inter Bank Rate rather than the Bank of England’s base interest rate, and this is the rate that is normally used between banks when they borrow of each other.
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