A LIBOR-based mortgage uses an interest rate based on the London Interbank Offered Rate, or LIBOR. The LIBOR is an index based on the average of interest rates used by major banks. It is calculated as a 1, 2, 3, 6, or 12-month average, among others. In Switzerland, LIBOR-based mortgages are commonly referred to as money market mortgages.
Swiss mortgage lenders primarily include 3 month and 6 month LIBOR-based mortgages in their LIBOR mortgage offerings. The interest rate of a libor mortgage is composed of the LIBOR base rate, plus a markup added by the lender (1%, for example).
The markup on the index rate varies from lender to lender, and also depends on the creditworthiness and debt ratios of the borrower. In Switzerland, if a LIBOR is negative, only the markup will be calculated, without taking the negative LIBOR into account. Relevant LIBOR rates are included in the moneyland.ch mortgage comparison tool.
Like fixed-rate mortgages, LIBOR-based mortgages generally have preset mortgage terms. Most LIBOR mortgage terms last 2 or 6 years.
Unlike fixed-rate mortgages, LIBOR-based mortgages use variable interest rates. However, interest rates do not directly follow the LIBOR index: rates are updated on a regular, defined basis (every 3 or 6 months, for example).
Because of this, the tenure of a LIBOR mortgage is divided into multiple interest periods, and the rate remains constant during each of these periods.
In practice, a LIBOR-based mortgage is made up of multiple, ultra-short-term fixed rate mortgages.