What is Libor?
Libor (London Interbank Offered Rate) is the interbank lending rate fixed every day by the British Bankers' Association (BBA) and is the interest banks charge to borrow from each other. Banks rely on this money to lend to customers.
How does it work?
Typically, the interest rates on mortgages were set using a formula such as "three-month Libor +1.5%". Every three months, the lender sets the interest for the next three months according to the Libor rate. Even if a mortgage was not initially priced at Libor, it is likely to have contained a provision that it would revert to Libor at the end of a particular term, such as a two-year fixed term.
Does it affect me?
It is estimated that in the past 10 years, at any one time only about 250,000 residential mortgages would have had a home loan linked to the Libor rate, rather than the Bank of England's base rate.
Many of these were buy-to-let loans from lenders such as Paragon and sub-prime borrowers.
An increase in Libor can add hundreds of pounds to annual mortgage repayments or a loan to a small business.
But the indications are that during the financial crisis, Libor was manipulated downwards so those with buy-to-let loans actually enjoyed interest rates lower than they might otherwise have had to pay.
So, did anyone lose?
The losers would be building societies and banks that deposit balances into short-term accounts where the interest paid is linked to Libor. They would have received a lower interest rate than they would otherwise have earned.
Also losing will be the lenders who packaged up mortgages into residential mortgage-backed securities during the pre-2008 lending spree.
These bonds paid an interest rate linked to Libor. Holders of these will have received lower interest payments than they might otherwise have had.
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