LIBOR and multi-currency mortgages
LIBOR (London Interbank Offered Rate) is a benchmark interest rate used for numerous financial products, such as bonds, deposits and loans. It is not widely used by consumers of banking products, being mostly applied in variable-rate multi-currency mortgages, which are not very commonplace. In these mortgages, LIBOR is used as a reference to calculate new interest rates periodically, much in the same way as EURIBOR is the reference rate for standard variable-rate mortgages.
What has happened to LIBOR?
On 31 December 2021 LIBOR will cease to be published for all its currencies (euro, Swiss franc, pound sterling and yen) and time periods, except for the overnight and 1, 3, 6 and 12-month US dollar LIBOR settings, which will continue to be published until 30 June 2023.
What will happen to variable-rate multi-currency mortgages referenced to LIBOR?
Once LIBOR disappears, these mortgages will lose the reference used in periodic revisions to calculate the interest rate to be applied and, accordingly, it will not be possible to determine the instalment amounts.
In some cases, the contract itself provides for a replacement rate if the initial one agreed ceases to exist. However, where this possibility has not been envisaged, the customer and the bank must reach an agreement to set the contract’s new reference rate.
What happens if my LIBOR multi-currency mortgage matures after LIBOR disappears?
The disappearance of the benchmark index is a key item in the mortgage contract. It is therefore very important for you to be aware of your situation. If your bank has not yet contacted you, ask them to inform you about your case.
Check the benchmark index established in the mortgage deed and whether there is an adequate clause establishing a replacement.
If there is no such clause, ask your bank for a solution and then assess it. It is by no means easy to do this, so here are some aspects you should consider:
- Ask for information on any expenses associated with the change of index.
- Ask for information on any alternative index proposed to you, its composition, track record and associated risks (e.g. ask about its past variability).
- Ask the bank to explain why it has proposed that index and in what measure it considers that the conditions offered (index, plus, if appropriate, the proposed spread) are fair and not detrimental to you.
- Ask for, and assess, the information on changes in the instalment amounts under different benchmark rate scenarios.
- Consider whether the offer involves any other commitment (e.g. if the proposed spread can vary when you purchase other products) or a change in other terms and conditions of your mortgage (e.g. if the proposal involves switching to euro, meaning that it would no longer be a multi-currency mortgage), and assess this possible change.
- If the bank proposes that you change to a fixed-rate mortgage, in addition to considering the instalment amount and related expenses, check if this involves any other commitments or substantial changes to your loan. Also, although this does not entail a change, remember that even if you switch to a fixed-rate mortgage, the instalments may continue to fluctuate owing to possible exchange rate variations in the currency you have arranged.
Measures being adopted by the European authorities
Given the significant volume in several European countries of mortgages referenced to Swiss franc LIBOR (CHF LIBOR), in order to avoid uncertainty about the continuity of these contracts after 31 December 2021, the European Commission (EC) designated a replacement interest rate benchmark in October. This replacement rate is mandatory for CHF LIBOR contracts, unless the contract includes a clause establishing a replacement or the parties have already agreed to set a new benchmark rate. If your loan is referenced to CHF LIBOR, ask your bank about this measure.