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The interest rates of a Libor mortgage are flexible during its term as they are directly linked to a reference rate. This is the London Interbank Offered Rate, which is issued on a daily basis and determines the conditions under which banks grant loans to each other. The Libor mortgage is linked to the same Libor rate as the Swiss franc.
Through this mechanism, the calculation of the Libor mortgage for residential customers is particularly comprehensible. However, this does not mean that all deals are offered on the market at the same rates, which is why a Libor mortgage should always be compared. In addition to the Libor rate, each bank proposes an individual margin on the interest rate. In addition, the interest rate should not be the only criterion in the decision.
The Libor mortgage compared to other mortgage types
In recent years, the Libor mortgage has been the most favourable way of financing for real estate ownership compared to the variable and fixed-rate mortgages. The conditions of the financial market were favourable for the banks, and they are obliged to directly pass on the favourable rates to consumers.
Compared to the Libor mortgage, the composition of interest rates is less transparent for fixed-rate mortgages and variable-rate mortgages. In those cases, customers can not directly understand how banks apply the conditions of the financial market when calculating the interest rate and the height of the respective margin. Banks are free, for example, to set interest rates for variable-rate mortgages and often issue them at significantly higher interest rates than Libor mortgages.
The advantages and disadvantages of Libor mortgages at a glance
The Libor mortgage has been the most favourable mortgage in recent years, particularly if interest rates fall after the credit agreement is concluded as the mortgage holder will benefit. Customers will also have the opportunity at the beginning of the contract to set the interval at which the interest rate adjustments are made to changes in the Libor rate. Common variants are found with adjustments in 3 and 6-month intervals.
The advantages are offset by the scenario of rising interest rates and uncertainties in the financing calculation. As the Libor mortgage is terminated with a fixed maturity, there is a risk of having to bear a financial burden in times of rising interest rates. Since forecasts for interest rate developments are always uncertain, mortgage clients should have a sufficient financial cushion when considering a Libor mortgage.
Protection against rising Libor interest rates
As a general rule, anyone who has a Libor mortgage should have financial reserves available to cope with an increase in the interest rate. In addition, mortgage holders are not completely powerless as interest rates rise. You can make an interest cap (CAP) when you sign a contract, and you will be insured if any additional costs are incurred. This interest rate hedge is associated with the additional costs for loan financing.
The switch option offers the opportunity to switch to the next adjustment date in a fixed-term mortgage as a way of avoiding escalating interest rates. Both variants are linked to a fee or a premium. It is worthwhile considering the cost of CAP and switch options for Libor mortgages. The expiry time must also be adhered to after changing the type of mortgage. Another variation to lessen the risk of Libor mortgages is mix financing. Here, Libor is combined with fixed-rate mortgages.
MoneyPark helps you weigh up the benefits and risks, taking into account your personal financial situation and the situation on the money market. We will create individual finance plans and work with you to prepare you for possible changes in interest rates.
Current mortgage rates
Libor mortgage from%
Fixed-rate 10 years from1.81 %
Fixed-rate 5 years from1.12 %
The displayed interest rates are the best rates currently available. Your personal interest rates may vary depending on LTV, affordability, mortgage amount and the location of the property.Your personal rates