LIBOR is an interest rate benchmark that has been used to calculate interest payments for some mortgages. LIBOR is due to end in its current form at the end of 2021. In future the interest rate for LIBOR-referencing mortgages will need to be calculated in a different way.
LIBOR aims to measure the interest rate at which banks can borrow from one another. But the interbank borrowing market which LIBOR seeks to measure is much less active than in the past.
This means LIBOR is not considered sustainable in its current form and is being phased out. The current form of LIBOR will no longer be published after 31 December 2021.
If you have a LendInvest Buy to Let mortgage where the interest rate is calculated by reference to LIBOR, then from 1 January 2022:
The method used to calculate Synthetic LIBOR is consistent with the wide consensus established in the UK and in other countries on a fair way of calculating a replacement rate for LIBOR.
Synthetic LIBOR is calculated by measuring the average difference between LIBOR and SONIA over the past 5 years, and then adding that average difference to SONIA. This difference between LIBOR and SONIA will therefore be fixed after end-2021.
The difference will be fixed at just below 0.12 percentage points (about one tenth of one percentage point) for the 3-month LIBOR setting used in some of our Buy to Let – LIBOR mortgages. Read the FCA’s Consultation Paper for more information on the methodology used to calculate Synthetic LIBOR.
Synthetic LIBOR, like the current LIBOR, will vary over time. For example, you can expect it to go up (or down) if the Bank of England’s base rate goes up (or down). The FCA has specified how Synthetic LIBOR will be calculated so that it provides a reasonable and fair estimate of what LIBOR might have been in the future.
As Synthetic LIBOR uses an average of the difference between LIBOR and SONIA over the past 5 years to approximate what LIBOR might have been in the future, there may be a small increase in your mortgage payment in January 2022 compared with your mortgage payment in December 2021.
However, you will no longer face the risk of future increases in your mortgage payment because of changes in the difference between LIBOR and the Bank of England base rate (which SONIA closely tracks).
There’s no action that you need to take, but you may want to consider whether you obtain independent financial advice on the end of LIBOR in its current form and what this means for you.
Free confidential and impartial advice is available from a number of organisations, including:
Citizens Advice
www.citizensadvice.org.uk
Advice UK
www.adviceuk.org.uk
Money Advice Service
0300 500 5000 or www.moneyadviceservice.org.uk/en