Mortgage interest rates and LIBOR: information for borrowers

From 4 January 2022, the way interest rates are calculated for the small proportion of UK mortgages that still reference LIBOR changed. This change could affect about 1 in 100 residential mortgages, and about 1 in 20 buy-to-let mortgages. If you are affected your lender (or mortgage administrator) will contact you.

LIBOR is an interest rate benchmark that has been used to calculate interest payments for some mortgages. The panel bank form of sterling LIBOR ended at the end of 2021. In future the interest rate for LIBOR-referencing mortgages needs to be calculated in a different way.

Why is this happening?

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 and is being phased out.

Do I have a mortgage which uses LIBOR to calculate my interest rate?

Most UK mortgage interest rates are not calculated using LIBOR. If you do have a mortgage that uses LIBOR, your lender will tell you. You may also be able to tell this from your mortgage documents, such as your mortgage offer, or mortgage terms and conditions.

What does the end of LIBOR mean for my mortgage?

If your mortgage uses LIBOR, your lender may need to amend its terms and conditions to change the way the interest rate is calculated. If so, they will tell you about this. They may also ask for your consent to make these changes.

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.  

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 didn'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 have therefore used our powers to put in place a temporary solution for certain products, including mortgages, that did not change by end-2021. In these cases, contracts are allowed to use what is commonly called ‘Synthetic LIBOR’ from the start of 2022. This is to 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 5 years, from 2016 to 2021, and then adding that average difference to SONIA. This difference between LIBOR and SONIA was therefore fixed after end-2021.  

The difference was 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.

Synthetic LIBOR and mortgages  

Synthetic LIBOR, like LIBOR in its previous form, will vary over time. For example, you can expect it to go up (or down) if the Bank of England’s base rate goes up (or down). We have specified how Synthetic LIBOR will be calculated so that it provides a reasonable and fair estimate of what LIBOR might have been in the future.

As Synthetic LIBOR uses an average of the difference between LIBOR and SONIA over a previous 5 year period to approximate what LIBOR might have been in the future, there may have been a small increase in your mortgage payment in January 2022 compared with your mortgage payment in December 2021.

However, you will no longer face the risk of future increases in your mortgage payment because of changes in the difference between LIBOR and the Bank of England base rate (which SONIA closely tracks).

How do I get more information about this?

Contact your lender if you have any questions about your mortgage.

Page updates

16/11/2021: Information added following FS21/11 and associated documents being published
22/06/2021: Editorial amendment