My mortgage & bbalibor™

What is it and how does it affect me?

Recently we have been getting increasing numbers of calls from people asking us for an explanation of bbalibor - specifically how it may affect their mortgages.

While the Bank of England fixes official base rates, bbalibor reflects the actual costs for banks to borrow money from each other.  Mortgages, which have rates set to bbalibor, will be influenced by movements in these rates, which do not necessarily always closely reflect movements in the Bank of England base rate.

What exactly is bbalibor?

bbalibor stands for the London Interbank Offered Rate and is the rate of interest at which banks borrow funds from each other in London.

bbalibor is the most widely used "benchmark" or reference rate for short term interest rates. It is compiled by the BBA in conjunction with Thomson Reuters and released to the market each day.

Is my mortgage linked to bbalibor?

Check with your bank or your mortgage documentation. There are several ways that lenders can calculate your monthly payment. Only certain mortgages are linked directly to bbalibor, and those that are should make this clear.

Which bbalibor rate?

There is more than one bbalibor rate. In fact, the BBA produces 150 rates every day: for ten different currencies and, within each of these currencies, for 15 maturities.

Each bbalibor rate is defined in terms of currency and maturity, for example “three month sterling bbalibor”.

It is very important to ascertain which bbalibor rate your mortgage is set against.  This will be clearly defined in your mortgage contract. If you are unable to locate the exact rate then you should speak to your lender.

Premium

On top of the bbalibor rate, each mortgage lender charges a fixed premium based on your individual circumstances at the time your lender offered your mortgage. This premium will vary between different borrowers but will be a fixed amount above the relevant bbalibor rate.

Mortgage rate resetting

For mortgages underpinned by bbalibor, the monthly payment rate will be recalculated at regular set times throughout the life of the mortgage. You will then pay the new fixed rate until the next recalculation. This usually happens every three months, although some mortgages have different periods between the recalculations. For example, if your mortgage resets on the 16th November and is set against three month sterling bbalibor, then your mortgage from 16th November to the 16th February will be fixed at the rate of three month sterling bbalibor on the 16th November (plus the premium as described above).

How can I keep track of bbalibor rates?

You can find current bbalibor rates in reports on Thomson Reuters website (www.reuters.com), other data vendor websites, or printed in the Financial Times, Wall Street Journal and other newspapers the next day.

For example, at the very bottom of the front page of the Financial Times there is a series of figures in the “World Markets” table. In the “interest rates” column, the final line is “UK 3m”. The entry for “price” on this line is the three month sterling bbalibor for the previous week day.

At the BBA we offer a complete back history of bbalibor rates for free on our website (www.bba.org.uk) on a seven-day delay, allowing you to see trends in the rates.

bbalibor movements

As premiums are a fixed value above bbalibor rates then your mortgage repayments will be directly affected by the level of bbalibor at the reset date.

bbalibor reflects the rates at which banks can fund themselves and will be influenced by changing market conditions. In periods of financial stress, the cost of a bank’s own borrowing will increase, which will in turn cause bbalibor to increase.  Similarly, bbalibor will decrease as levels of financial stress ease.