The Libor mortgage as the most common form
In the past, a Libor mortgage has always been particularly attractive and has turned out to be a much cheaper form compared to a fixed-rate mortgage. Actually, Libor mortgages are also only fixed-rate mortgages, albeit with very short terms, usually only a few months.
The LIBOR (London Interbank Offered Rate) determines the amount of interest that is charged for this type of mortgage. The Libor is an average of the interest rates that are relevant for banks. The interest rate would correspond to what banks would borrow or borrow on the money market in Europe. The term for this borrowed money is always set at twelve months.
Now the Libor will be abolished by the end of 2021. It will be replaced by another interest rate that appears more suitable as a reference interest rate.
That brings the abolition of the Libor
The experts are of the opinion that the Libor is too unrepresentative and that there are no real deals that can be concluded for some of the maturities of the Libor. In addition, the Libor is now to be abolished by the end of 2021 because many banks had used it for their own benefit and reaped the profits they made on interest rate derivatives themselves. The Libor also helped to avoid losses on interest rate derivatives, but again thanks to the influence of the banks in their own favor.
The principle of the money market mortgage will still exist after the end of the Libor, but it will then be called a different one. In Switzerland it will be the Saron, the? Swiss Average Rate Overnight ?. Unlike the Libor, the Saron is calculated on the basis of transactions that have actually been carried out, with the SNB and SIX as exchange operators being responsible for calculating the Saron. It should not be possible to manipulate the Saron.
Most money market mortgages are only designed for a term of three or six months. This will not apply to the Saron, because it represents the interest rate for a single day. The National Bank has put together a working group which, in turn, has calculated various options for using the Saron for money market mortgages. A total of seven variants have come out here, whereby a common component of the Saron is always the Compounded Saron. This represents an average value of the Saron in the past.
Many banks have limited the Libor, which is still valid, to a term until the end of 2021. Others no longer offer such mortgages at all and recommend the common fixed-rate mortgages to their customers. The reason: the bank earns significantly more on a fixed-rate mortgage than on a money market mortgage, and customers cannot simply switch to a more affordable form of mortgage as soon as interest rates rise.
Experts suspect that many banks will use the changeover from Libor to Saron to raise interest rates directly or to achieve larger margins.
Conclusion: The end of the Libor mortgage is imminent
The time will come at the end of 2021 and there will be no more Libor mortgages. Some banks are already no longer granting such mortgages and prefer to sell their customers the fixed-rate mortgages, which are much less attractive to the mortgagee.
This type of mortgage is better for the bank as it is more expensive for customers. From the point of view of the banks it is understandable that the Libor should be exchanged in favor of the Saron, which is better for them, from the point of view of the customers it is now: keep your eyes open when buying a mortgage!
