The Libor mortgage is also known as a money market mortgage. It is based on a fixed negotiated margin and the current Libor rate. This model is suitable for bank clients who wish to benefit from falling interest rates.
What is a Libor mortgage?
The word Libor stands for London Interbank Offered Rate which refers to the interest rate that banks charge each other when borrowing or lending money in the short term. With Libor mortgages the interest rate is made up of 2 components- the negotiated margin and the Libor interest rate. For example, if the negotiated margin is 1% and the Libor interest rate is 0.4% then total mortgage interest rate would be 1.4%. It is worth knowing that the margin does not change for the duration of the mortgage, but the Libor rate can change daily. On taking out a Libor mortgage the customer chooses the interval (Term) at which the interest rate is adjusted to the current Libor rate. If, for example, the chosen term is three months, then the interest rate will be adjusted on a quarterly basis.
The Libor mortgage is also known as a money market mortgage or flex roll-over mortgage. The customers sign a framework agreement with a term of between three and five years. During this period, the mortgage can also be converted into a fixed-rate mortgage, but the customers must remain with the same bank. It is possible to change banks, but this involves an expensive early repayment fee.
Advantages of a Libor mortgage
- High flexibility for bank customers
- Borrowers benefit from falling interest rates
- Amortisation possible within the term
- Conversion into a fixed-rate mortgage possible
- Hedging through agreement of an interest cap
- Transparent interest rate
Disadvantages of a Libor mortgage
- Binding framework agreement
- Rising interest rates increase the interest burden
- Accurate budgeting for interest not possible
- Monitoring of interest rates necessary
- Agreed margin can be adjusted by the bank
In many cases, a Libor mortgage can be more attractive than fixed or variable mortgages. This is particularly true in times of low interest rates. Libor mortgages are suitable for bank customers who are prepared to take risks, because if interest rates rise, the mortgage interest rate will also rise. In any case, it is worth comparing the mortgage models closely with regard to the individual financial situation.