What is Libor?
Libor is an abbreviation for the London inter-bank offered rate. As the name suggests, it’s the rate at which banks in London lend to each other. There are many different Libor rates relating to lending for different periods of time. Most commonly, when people refer to the Libor rate, they are talking about 3-month Libor.
Libor rates are currently set each day via a process that is managed by the industry trade body, the British Bankers Association (BBA). The BBA sends out a survey to a panel of the largest banks each day, asking what rates they are able to borrow at from other banks over different time periods. The highest and lowest four rates are discounted, and the rest are averaged to give the Libor rate.
Why are Libor rates relevant to mortgages?
Many mortgage rates are determined by Libor rates, as one of banks’ main sources of funding is borrowing from other banks.
Commercial and buy-to-let mortgages are often pegged directly to Libor, although some residential mortgages are also linked to Libor, especially those specialising in customers with adverse credit.
The Libor fixing scandal, which emerged in the summer of 2012, could mean that people whose mortgages are linked to Libor were mis-priced. It is not yet clear whether this would have been to their benefit or detriment, and there are investigations ongoing into the rate fixing scandal.
Although most residential mortgages track the Bank of England base rate, some will follow Libor (London Inter Bank Rate) instead. This is the rate at which banks lend to each other and it can vary day to day, so there is more movement in it than the base rate.
A Which? Mortgage Adviser will be able to talk to you about the possible benefits and drawbacks of opting for a Libor mortgage. But you may prefer to opt for a tracker mortgage or another type of variable rate or a fixed rate mortgage deal instead.
Speak to an impartial mortgage adviser
To discuss your mortgage options, speak to a Which? mortgage adviser by calling us on 0117 981 7787 – or request a call back. Our advisers look at every mortgage from every available lender, and because they’re paid a salary – not a sales commission – you can have confidence that you’ll receive truly independent advice.