How did the Libor mortgage work?
The Libor mortgage was the former short-term money market mortgage offered by Swiss banks. It was replaced by the Saron mortgage in 2022. Read on for the key points about the forerunner to the Saron mortgage.
22.04.2022
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1. Libor mortgage replaced by Saron mortgage
The Saron mortgage was replaced the Libor mortgage at the end of 2021. Some banks converted these mortgages automatically. Others stopped granting Libor mortgages with terms going beyond the end of the Libor.
Among other factors, which mortgage model is most suitable for you depends on your need to be able to plan with some certainty. Regardless of the model, it is worth comparing different lenders.
2. How the Libor mortgage worked until the end of 2021
Libor stands for London Interbank Offered Rate. This was the interest rate banks charged for short-term lending between themselves. It changed every day. With the exception of selected USD Libors, banks stopped applying Libor interest rates as of the beginning of 2022. The remaining US Libor terms will be published until June 2023.
With Libor mortgages, the interest rate changed during the repayment term, like a variable-rate mortgage. It was calculated using the Libor and a margin determined by the mortgage lender in question. The mortgage was also known as a money market mortgage.
Depending on the contractual arrangement, the lender adjusted the interest rate every three to six months to reflect market conditions. The contractual period in which the mortgage rate was automatically adjusted was also fixed. It was usually three to five years.
3. Advantages of the Libor
A Libor mortgage comprised just two components: the Libor interest rate and the margin set by the bank. However, the Saron more closely reflects the market because it is based on actual transactions.
In a non-inflationary environment, Libor-based mortgages were the best-value solution. When interest rates fell, borrowers with a Libor mortgage benefited quickly and directly from interest rate cuts.
4. Disadvantages of the Libor
The Libor was set only once a day by a group of London banks. The Saron is the average of the compounded daily interest rates actually traded. This makes it less volatile.
By contrast, the Libor was set by representatives of the bank, leaving the rate open to manipulation. This has also led to certain financial scandals, which is one of the reasons the Libor was replaced.
This article was first published on 03.07.2017
