What is a LIBOR mortgage?

LIBOR mortgage terms

In recent years, a LIBOR mortgage has become an attractive alternative method of financing real estate when compared with the cost of fixed- and variable-rate mortgages. Especially during the low-interest phase which began in 2013, average LIBOR mortgage interest rates have consistently been one per cent lower, or even more.

The LIBOR mortgage interest rate consists of the LIBOR rate plus a margin which is set by each respective bank. Although the LIBOR itself is updated daily, these micro-adjustments do not affect the mortgage rate. Instead, customers can choose the intervals at which such LIBOR adjustments are made – usually after 1, 3, 6 or 12 months. A LIBOR mortgage contract usually runs for between 2 to 6 years.

When it pays to take out a LIBOR mortgage

With a LIBOR mortgage, clients should consider whether they are willing to accept the inherent risk of rising interest rates. The ideal scenario is that which occurs when LIBOR interest rates continue to drop after completion of the mortgage contract. A client then quickly benefits from these further reductions, whereas a fixed mortgage simply remains at the previously fixed interest rate. Another important element to take into consideration is the difference between the interest rates on a LIBOR mortgage and a fixed-rate mortgage. The greater the discrepancy, the more likely a LIBOR mortgage will be worth the risk.

Should interest rates increase during the term of a LIBOR mortgage, borrowers are not necessarily obliged to wait until the contract terminates before taking action. An Interest Cap or a Switch Option offer two ways to avoid strongly rising interest rates. The Interest Cap works like an insurance policy: in return for a fee paid to the bank lender, when the contract is drawn up, the borrower can secure a maximum limit at which the interest rate will be "frozen". With a Switch Option, the LIBOR mortgage can be converted to a fixed-rate mortgage, again in return for a fee payment.

Predicting LIBOR trends

It is always important to assess the market environment before deciding on a LIBOR mortgage. Experts can forecast anticipated money market changes in the near future with a certain degree of accuracy, and the Swiss National Bank, which indirectly controls the LIBOR over a target range, plays a decisive role in the process.

In order to ensure price stability, the National Bank takes account of economic trends, and experts in turn base their assessment of LIBOR mortgage trends on National Bank reports and inflation forecasts. However, no absolute guarantees can be given, so borrowers should ensure they have financial reserves available to meet any possible additional costs.

A summary of the advantages of a LIBOR mortgage

• Favourable terms and transparent interest rate structure
• Opportunity to benefit from falling interest rates
• Optional safeguarding against rising interest rates

A summary of the disadvantages of a LIBOR mortgage

• A risk that rising interest rates may generate additional costs
• Close monitoring of market trends is essential
• Fluctuating interest rates make longer-term planning more difficult

MoneyPark helps you compare LIBOR terms from different banks to find the most attractive interest rates. We will also provide you with detailed information about any other terms and conditions which apply to each respective product. And last but not least, our consultants carefully survey and monitor the markets so we can provide you with a comprehensive risk assessment.