What is the Libor Interest Rate

From LoveToKnow Mortgage

If you have applied for an adjustable rate mortgage or credit card lately you may find yourself wondering what is the Libor interest rate? The Libor rate can make a big difference in the amount of interest you might be paying on your loan.

Accurate Libor rate forecasts are difficult to develop.

The British Prime

The London Interbank Offered Rate (LIBOR) is the average of the rates which the highest-rated banks in England would charge to borrow money from each other. In many ways it is equivalent to the Prime Rate in the United States, which is the inter-bank loan rate of highly-rated United States banking institutions.

The rate is determined every London business day morning at 11 a.m. Greenwich Mean Time by the British Bankers Association (BBA). The BBA compiles the rates from as many as 16 banks. This compiling is done on various loan terms from overnight to one year in length. An average is run for each of the loan terms. The resulting averages become the Libor rates for each loan term for that specific day.

Benchmarks for Global Markets

The Libor rates are frequently used by lenders throughout the world as a benchmark from which the lender can determine their own interest rates. The Libor rate is frequently used for a variety of lending products such as adjustable rate mortgages, credit cards and business loans.

The Libor rates are calculated in Eurodollars. The rates are also calculated in nine other currencies, which enables the rate to be used in a variety of global financial markets. Currently, the Libor rate is calculated in the following currencies:

Eurodollar
Pound Sterling
United States Dollar
Japanese Yen
Swiss Franc
Canadian Dollar
Australian Dollar
Swedish Krona
Danish Krone
New Zealand Dollar

International Distribution

As soon as the BBA has determined the Libor rates for the day, the BBA distributes the data quickly to several international data vendors including:

MoneylineTelerate
Reuters
Thomson Financial
Bloomberg
Quick
Infotec
Class Editori
IDC
Proquote
Telekurs

There are many ways to get an answer to the question "What is the Libor interest rate?" The international data vendors provide the rate data to the financial press, such as the Wall Street Journal and the Financial Times, which both publish the Libor data the next day. For example, the Libor rates from the prior day are published each business day in the Money Rates table in the "Money & Investing" section of the printed and online version of Wall Street Journal. In addition to newspapers, many financial websites are licensed to publish the Libor rates at the end of London's business day.

You don't have to find a financial newspaper or website to check the Libor rate. The BBA publishes the current Libor rates as well as historical Libor data on their website.

The Basis for Adjustable Rates

In the United States, the rates for adjustable rate mortgages and credit cards are often established based on one of the Libor rates plus a certain percentage called the "margin." When the Libor rates go up, the mortgage interest rates in the United States which are calculated on the Libor rates usually also go up. A mortgage loan will usually have a maximum interest rate that can be charged during the term of the loan. This maximum is called the "cap."

The most frequently used Libor rate in mortgage rate calculations is the 6-month rate; however, the 1-Month, 3-Month and 1-Year Libor rates are also used by some lenders. Lenders who don't use the Libor rate will use some other financial rate as the basis of their rate setting, such as the 11th District Cost of funds or the 6-Month Treasury Bill.