The LIBOR mortgage was an adjustable-rate mortgage model formerly used in Switzerland which was based on the LIBOR. In 2021, the SARON replaced the LIBOR as the primary money market reference rate in Switzerland.
The LIBOR was a daily interbank interest rate. Average LIBOR rates over terms of 1, 2, 3, 6 and 12 months were also calculated. In Switzerland, LIBOR mortgages were sometimes referred to as money market mortgages or rollover mortgages.
In Switzerland, LIBOR mortgages were most commonly based on the 3-month or 6-month average LIBOR. The interest rate of a LIBOR mortgage was made up of the LIBOR rate plus a markup added by the mortgage lender.
The size of the markup varied between lenders and also varied based on the creditworthiness and debt-to-income ratio of the mortgagor.
When the LIBOR was negative, the interest rates of Swiss LIBOR mortgages were normally composed entirely of the lender’s markup. In this case, the interest rate was identical to the lender’s markup.
LIBOR mortgages had fixed mortgage terms, much like fixed-rate mortgages. Terms between 2 and 6 years were most common for LIBOR mortgages.
Unlike fixed-rate mortgages, the interest rates of LIBOR mortgages were variable. Rather than changing daily along with the LIBOR, the interest rates of LIBOR mortgages remained fixed over interest intervals (3 months or 6 months, for example).
So, the interest rates of LIBOR mortgages would remain fixed for over short interest terms, which collectively made up the full mortgage term. In other words, a LIBOR mortgage was a collection of fixed-rate mortgages with very short mortgage terms.
More on this topic:
Swiss SARON mortgages explained
Swiss LIBOR mortgages explained
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