Libor Rates

Calculating Libor Rates

Libor rates are updated on a daily basis. Rather than quote interest rates for one interest period, information about borrowing over several time periods are quoted. The daily rate is posted before noon (UK Time) each business day.

The rate is set based on an equation calculated based on the following data:

• Interest Rates from 16 Banks are Collected Daily at 11 a.m.
• The Middle Half of These Figures are Averaged Together
• This Number is the Libor rate for that day

This calculation is repeated a number of times to calculate rates for each loan period from overnight to 12 months, and the rate is also quoted in several currencies.

Rate Changes

If you are following these rates in the newspaper or online, the overnight rate is the one quoted most often. When the rates fluctuate rapidly, this can be taken as a sign that the financial markets are volatile. For a longer-term prediction of market conditions, check out the 12-month rates.

Getting a Libor Mortgage

Some mortgage lenders offer loans using Libor rates as the base rate on which to calculate the rate of interest the borrower is charged. The six-month rate is generally used to form the basis of mortgage rates. When interest rates are low, choosing a Libor mortgage makes sense. The borrower will pay a lower rate than with a mortgage based on a different base rate.

When to Consider a Libor Mortgage

A Libor mortgage may make sense in the following circumstances:

• The homeowner is only planning on being in the house for a relatively short time (a few months to a year).
• The borrower expects interest rates to remain stable or drop in the foreseeable future.
• The borrower is interested in qualifying for a larger mortgage.
• The homeowner wants or needs to have a lower monthly payment for the initial part of the payment term.

Under the provisions of a Libor mortgage, the interest rate is fixed for a specific time. This intial rate may be locked in for as little as six months or as long as 10 years. After that point, the rate varies depending on the Libor rates. A margin is also added to the rate, so the borrower ends up paying the Libor rate + a certain percentage on top of that rate.

The terms of the Libor mortgage will likely also include a rate adjustment cap. This means that the percentage by which the interest rate can change is limited to a certain percentage. This figure may be as low as 1% for a six-month term.

Disadvantage to Choosing a Libor Mortgage

Since the interest rate on this type of mortgage is variable, if the Libor rate increases, so does the interest paid on the mortgage. It may be challenging to keep up with the payments if this occurs.

To find out whether a Libor mortgage makes sense for your situation, ask your bank, financial advisor, or mortgage broker to explain this option in detail. If you feel that interest rates will go down or stay stable, this type of adjustable-rate loan might make good sense for you. On the other hand, if you are the type of person who will be up at night worrying about where interest rates are headed, then you may be better off choosing a different type of loan product - one that is not based on Libor rates.