If your mortgage is linked to a “benchmark index rate” it was most likely in the past to be either the Bank of England’s Base Rate or LIBOR: London Interbank Offered Rate (LIBOR), which has acted for decades as the main reference rate for financial products globally, including loans, derivatives and bonds.
It’s based on the average at which large global banks would lend funds to each other and is commonly calculated in seven maturities across five currencies.
Discussions about finding a replacement rate have continued for several years, driven largely by the controversy that ignited when it emerged that LIBOR had been manipulated by several banks.
The scandal came to light fully in 2012. By 2018, the Financial Conduct Authority (FCA) confirmed that LIBOR would be phased out by the end of 2021. The regulator asked market participants to begin considering how they would transition to a new rate.
The big question that emerged was ‘what should the new reference rate be?’ Hundreds of trillions of pounds of financial assets around the world are linked to LIBOR and many legacy contracts do not provide for what happens if the benchmark ceases to be published.
Enter: SONIA – The Sterling Overnight Index Average (SONIA) was put forward as a replacement for LIBOR.
SONIA differs from LIBOR in a number of ways. It is based on actual transactions and is not set, currently, in different maturities. SONIA reflects the actual average interest rates that banks pay to borrow sterling overnight from other institutions, unlike LIBOR which is forward looking.
Some mortgage customers may be impacted by this change, as a number of lenders have reversionary rates that are tied to LIBOR and which will need to be replaced by a new benchmark.
Some institutions are moving to the Bank of England (BoE) base rate with which customers are generally familiar.
Therefore the transition from LIBOR should, in practice, represent a change in the calculation of customers’ mortgage rate, rather than a change in the rate itself.
If you are concerned about how your interest rate might be affected by this change, either call your lender or e-mail: