Libor Mortgages

Libor mortgages can be difficult to grasp, even though they bear a resemblance to tracker mortgages as they track a rate and flucutuate.

Libor stands for the London Inter-Bank Offered Rate, which is the rate at which banks will borrow money from each other. This rate is compiled daily by the British Bankers' Association.

The rises and falls of Libor rates are determined by the demand and supply of money in the markets and how high lending levels are.

The Libor rate generally fluctuates just above where the market thinks the Libor rate will be three months later, which usually constitutes about 0.15 per cent. If you stick to a Libor mortgage, it will track the Libor rate for about three months. Thus, unlike tracker mortgages, Libor mortgage will not change each time the Libor rate goes up or down, but about once in three months.

As a rule, Libor mortgages do not hold a strong appeal to first-time buyers, and are seen as an attractive option mostly by sub-prime and self-cert borrowers. At the very beginning of the mortgage term the Libor rate will be fixed, but soon it will be adjusted to agree in value with the Libor.

Those who choose a Libor mortgage do so not because the Libor rate is attractive for them, but because it is adjustable. It might be reasonable to look at the Libor projections given by the experts. For instance, if they say the three month rate is likely to be lower than six month rate, you get some idea about where the market is going and what option is less risky.

Libor mortgages would not be a good option for those who don’t want to take very much risk, as there can be no guarantee that a Libor mortgage deal will offer the best value. This type of mortgages is likely to benefit people who stay informed about the situation on the financial market. So if you have no desire to study the financial market, it’s better to keep away from Libor mortgages.


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