The LIBOR Interest Rate In Retail Banking
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In contrast to other mortgage rates, the LIBOR rate is variable and depends on the financial market. This form of credit, therefore, offers the possibility to profit from falling interest rates even during the term. As a result, however, there is also the risk of having to accept higher costs in terms of credit financing. The LIBOR interest rate for Switzerland and other currencies is published daily in London. The abbreviation LIBOR stands for London Interbank Offered Rate.
Originally, the LIBOR interest rate was a rate that was solely relevant for the payment transactions between financial institutions. For a number of years, it has also been used for retail banking, and so far the LIBOR mortgage took a development that has made it the most favourable financing variant. The market share of LIBOR mortgages in the financing of real estate is 10 to 15 percent in Switzerland.
Learn more about what exactly a LIBOR mortgage is.
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How the LIBOR Mortgage Interest Rate Is Calculated
In addition to the daily LIBOR rate, the interest rate for private Libor mortgages depends on a bank-specific margin. This is determined depending on the financial situation of the customer and added to the LIBOR rate. The margin remains unchanged throughout the term of the mortgage. The market is usually from 2 to 6 years. This is a decisive difference to variable mortgages - these are usually not linked to a fixed maturity, but rather with fixed notice periods.
The mortgage interest rate is not adjusted daily to the requirements in London. Instead, borrowers in the loan contract determine an interval in which the interest rate is adjusted. Customization intervals of 3, 6 or 12 months are often offered. The length should primarily be made dependent on whether a low-interest rate is pending or whether rising rates are predicted. A short adjustment interval allows for fast falling interest rates, while longer intervals dampen the cost burden with rising mortgage interest rates.
Protection If the LIBOR Mortgage Interest Rate Increases
The fluctuating LIBOR rate has so far prevented many consumers in Switzerland from financing real estate ownership with a LIBOR mortgage. Because of the risk of rising rates, borrowers should have an appropriate financial protection plan in place that can cushion the additional burdens by raising interest rates. However, customers are not exposed to rapid interest rates. The switch option and the CAP option offer possibilities for action:
Switch option: This clause allows the borrower to convert the LIBOR to a fixed-rate bank during the contract period. As a rule, the next set-up date is set. The duration of the contractual term shall remain as a minimum term. Many banks also offer the possibility to extend the term. With this option, customers can react to the onset or imminent increases in LIBOR interest rates - for example, after interest rate changes by the Swiss National Bank. The use of the switch option is usually associated with a small fee.
CAP option: This is another form of insurance with rising interest rates. The cap defines the maximum level of the interest rate. Even if the interest rates in the market exceed the cap, the mortgage holder pays only the predetermined maximum rate. Security by such a capping is subject to an additional payment, the amount of which is in turn dependent on the level of the interest rate and the duration of the maturity. The lower the LIBOR rate capping and the remaining maturity, the lower the additional premium.
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