What is a LIBOR mortgage?
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Among variable-rate mortgage offers, the LIBOR mortgage has long been popular. It has recently been replaced by the SARON mortgage. This type of loan ensures an adjustment of the interest rate, based on a characteristic financial indicator.
To find out if this mortgage solution is likely to be a good match, you need to understand the nuts and bolts. We offer a quick and simple explanation, so you can get to grips with this formidable investment tool.
What is a LIBOR mortgage?
LIBOR stands for "London InterBank Offered Rate". It is an interest rate that was used as a reference. It was based on the average rates at which banks offer you to borrow money, on a current sum. This figure is updated every day.
The LIBOR mortgage in brief
The LIBOR mortgage was therefore a mortgage loan whose interest rate was updated according to this indicator. When taken out at the right time, it could save you a lot of money. There were, however, certain risks.
Advantages
Thanks to this well-known indicator, you could take advantage of a transparent variable rate, which you could monitor regularly. It also represented the opportunity to take advantage of falling rates, depending on market fluctuations.
Since 2013, those who opted for this solution have been the winners compared to those who chose a fixed rate. Indeed, in recent years, interest rates offered by banks have only fallen.
The disadvantages
If you could benefit from falling interest rates, you could also suffer from rising ones. This could considerably increase your mortgage costs. On the other hand, it seems that in recent months, interest rates have started to rise again. You'll therefore potentially find it harder to plan the expenses associated with your real estate project by choosing this type of loan.
Subscribing a LIBOR mortgage also required careful monitoring of the market, to anticipate fluctuations.
How is the LIBOR rate calculated?
The LIBOR rate was the one offered to you by your bank, when you chose the LIBOR mortgage. This was LIBOR, to which the lending institution would add a margin. This margin was fixed and determined when the contract was signed.
With a formula of this type, when you negotiate your mortgage with the bank, you can therefore try to negotiate this famous margin.
The LIBOR mortgage: for which profile?
The LIBOR mortgage was aimed at profiles willing to take the risk of rising rates. In other words, if you're rather risk-averse, or want to anticipate all your costs, this solution wouldn't have suited you. In that case, you were better off opting for a fixed-rate mortgage.
How often is the LIBOR rate adjusted?
While the LIBOR indicator was updated every day, this was not the case for your credit rate. So there was no need to stress every morning about the evolution of this indicator. Adjustments were made according to the frequency chosen when the contract was signed. This could be every 1, 3, 6 or 12 months. The adjustment undergone by your interest rate was the result of the average of LIBOR, over the last elapsed period.
How long was the LIBOR mortgage?
The LIBOR mortgage generally lasted between 2 and 6 years. This is a shorter term than the fixed mortgage, which can be spread over 10 to 15 years. This formula was therefore ideal if you wanted to amortize your investment quickly.
It wasn't open to all pockets, since your income and the price of the property had to be compatible with a maximum debt ratio of 30% required by the banks.
What to do in the event of an increase in the variable rate?
One of the first things you need to know is that you need to have a financial reserve available, to anticipate a significant rise in charges. To guarantee your financial security, the bank may even check your available funds.
Be aware that when you take out your contract, you determine an upper limit, beyond which the rate is frozen. It cannot exceed this threshold. This is very important, as it is often enough to reassure investors who are hesitant to take out this type of mortgage.
This security limit comes at a price. In fact, it's a guarantee that you pay for, through a premium paid to the bank.
What are the differences between Libor and Saron mortgages?
As you may have gathered from the introduction to this article, LIBOR is history! Since 2021, the LIBOR mortgage has been replaced by the SARON mortgage. The latter is, as its name suggests, based on the SARON indicator. LIBOR was too easily manipulated. Its replacement therefore offers a more objective indicator, truly reflecting the financial markets.
If you choose to opt for this alternative, you can enjoy the same advantages and disadvantages presented above.
Why use an advisor?
For more and more individuals, using a financial advisor has become a must.
Choosing the right mortgage model
First and foremost, this professional represents the opportunity to obtain an informed analysis of your project. He or she will be able to advise you on the mortgage model that matches your profile, your availability and your ambitions.
Thanks to well-thought-out financial packages, he can also help you make valuable savings. From rate negotiation to tax optimization and the search for the best terms, our missions are numerous to help you.
Follow SARON
If you choose a variable-rate mortgage, as the LIBOR mortgage was, the support of a financial expert is a real asset. In particular, he or she can help you accurately anticipate market trends. He or she will also be able to advise you at the time of underwriting, on the suitability of this solution in relation to the loan term.
Finding alternatives
If the timing isn't right for a SARON mortgage, or rates are rising, an advisor can also guide you. He or she can analyze the terms of your commitment objectively, to help you extract the best possibilities.
Updated on: 31.01.2024Written by Valery ChantepyHead of mortgage department at CompareaTo learn more about our team click here.