10:00 AM, 18th November 2021, About 2 weeks ago 5
Precise Mortgages are now writing to their Buy-to-Let borrowers, confirming any current mortgages based on LIBOR will have their interest recalculated to 3-month term SONIA (Sterling Overnight Index Average). The transition to SONIA from LIBOR will take place as of the 1st January 2022 and the lender considers it a fair replacement rate.
LIBOR aims to measure the interest rate at which banks can borrow from one another. But the interbank borrowing market which LIBOR seeks to measure is much less active than in the past. This means LIBOR is not considered sustainable in its current form and is being phased out. The current form of LIBOR will no longer be published after 31 December 2021.
The FCA backed alternative:
There are several ways your lender might change the interest rate calculation. For example, they may choose a different rate to reference, such as the Bank of England ‘base rate’, or a rate known as SONIA. SONIA is a widely used measure of sterling overnight interest rates, that is also closely linked to the Bank of England’s base rate.
We have been clear with firms replacing LIBOR with an alternative rate that they must treat consumers fairly.
There’s a wide consensus in the UK and in other countries on a fair way of calculating a replacement rate for LIBOR. We have told UK mortgage lenders that if the arrangements they put in place for their customers are in line with that we will consider that they have treated customers fairly. Information provided to us shows lenders either following this, or replacing LIBOR with the Bank of England’s base rate or SONIA without further adjustment. We consider all of those arrangements are fair.
SONIA is administered by the Bank of England meaning they take responsibility for its governance and publication every London business day.
SONIA is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors.
Financial businesses and institutions use SONIA in a variety of ways. For example, to calculate the interest paid on swap transactions and sterling floating rate notes . SONIA is used to value around £30 trillion of assets each year.
SONIA is the Working Group on Sterling Risk Free Reference Rates’ preferred benchmark for the transition to sterling risk-free rates from Libor.
SONIA was introduced in March 1997. The BofE took responsibility for it in 2016 and, after consultation, reformed it in 2018. The way the BofE runs SONIA complies with international best practice for financial benchmarks.
What happens if your mortgage isn’t moved onto a different rate?
Despite lenders’ efforts to replace LIBOR in mortgage contracts, there may be some cases where this doesn’t happen before the end of 2021.
This may be the case, for example, if the customer’s consent to a change is required, but that consent has not been provided. We are therefore using our powers to put in place a temporary solution for certain products, including mortgages, that have not changed by end-2021. In these cases, contracts will be allowed to use what is commonly called ‘Synthetic LIBOR’ from the start of 2022. This will avoid the risk of the mortgage contract no longer working because mortgage payments cannot be calculated.
As Synthetic LIBOR will not last forever, it is still important to respond to your lender when they contact you about moving away from LIBOR.
How will Synthetic LIBOR be calculated?
The method used to calculate Synthetic LIBOR is consistent with the wide consensus established in the UK and in other countries on a fair way of calculating a replacement rate for LIBOR.
We have calculated Synthetic LIBOR by measuring the average difference between LIBOR and SONIA over the past 5 years, and then adding that average difference to SONIA. This difference between LIBOR and SONIA will therefore be fixed after end-2021.
The difference will be fixed at just below 0.12 percentage points (about one tenth of one percentage point) for the 3-month LIBOR setting used in almost all sterling LIBOR mortgages. Read our Consultation Paper for more information on the methodology used to calculate Synthetic LIBOR.
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