If you’re a residential mortgage customer it’s unlikely you’ll have come across LIBOR, but those with investment mortgages and commercial finance products may have done so in the past. We look at LIBOR and LIBOR mortgage rates, whether they are still used in the UK, and what alternatives are available.
What is a LIBOR mortgage and can you still get one?
The London Interbank Offered Rate (LIBOR) was a benchmark interest rate from 1986 to 2021. It was used to calculate the costs of borrowing between major global banks. Central banks also used it to gauge market expectations for interest rates, in order to set their rates. The Bank of England (BofE) once set the base rate using these expectations, for example.
LIBOR mortgage rates typically applied to commercial products, such as Buy-to-let or commercial investment mortgages, rather than residential products, although it was sometimes used for particularly bad credit mortgages.
The Financial Conduct Authority (FCA) discontinued LIBOR on 31 December 2021. This was following legislative and regulatory changes that found LIBOR was no longer a sustainable reference rate.
Why were they phased out?
LIBOR was the subject of a major rate rigging scandal in 2012, during which many global banking employees were found to have colluded to manipulate the LIBORs to keep them at their preferred levels to increase the profits of traders holding LIBOR-based financial securities.
While LIBOR shifted from British Bankers' Association (BBA) to Intercontinental Exchange (ICE) administration in 2014 to address the issue, it was later phased out entirely in the summer of 2023, with the final rates published on 30 June 2023. This was a result of multiple factors, including the 2012 scandal, as well as concerns about accuracy of the rate, and general changes in banking practice.
Kellie Steed - Content Writer
What replaced LIBOR mortgages?
A UK working group consisting of members of the BofE and the FCA was formed to oversee the transition of LIBOR and develop alternative rates to replace it. They developed the Sterling Overnight Index Average (SONIA).
SONIA is now used as the preferred rate for most commercial mortgages, however, some lenders offer rates that follow the BofE base rate. SONIA is published based on the base rate set and published by the BofE. This overnight rate is measured each day of the interest period to produce a final interest rate at the end. SONIA is considered to be far less risky as it doesn’t have a set term bank credit or liquidity premium.
Your options if you are currently on one
If you were previously on a LIBOR mortgage, your lender should have automatically switched the LIBOR-linked part of your mortgage onto an alternative rate by 31 December 2021. This was a requirement of the FCA.
If you have any questions about your transitioned mortgage rate, it’s a good idea to speak to your lender, or a mortgage broker for advice. There are still plenty of competitive commercial borrowing options and the phasing out of LIBOR should not have a significantly detrimental impact on the interest rates you’ll pay.