LIBOR is going away in 2021!

A series of fraudulent transactions connected to the LIBOR first reported

Here are 5 things to know about LIBOR:

  1. LIBOR stands for Intercontinental Exchange London Interbank Offered Rate, the world’s most widely used benchmark for short-term interest rates.
  2. LIBOR rates are published Monday-Friday at 11:30am London time.
  3. Banks commonly use LIBOR as the benchmark rate to charge each other for short-term loans.
  4. LIBOR is used for debt instruments including student loans, credit cards and Adjustable Rate Mortgages.
  5. Adjustable Rate Mortgages adds the LIBOR rate + ARM Margin rate to calculate the variable interest rate portion.

Adjustable Rate Mortgages are 30-year mortgages with an interest rate fixed for 5, 7 or 10 years. For example, a 7-year adjustable rate mortgage is a 30-year mortgage with a fixed interest rate for first 7 years with a variable interest rate for the remaining 23 years.

The ARM margin rate is determined by the bank and is fixed for the life of the loan. A common margin rate is 2.25%. Today, the 1-year LIBOR rate is 1.73%. Based on these rate, ones adjustable rate mortgage would be 3.98% today.

“This date is far enough away to reduce the risk and costs of a more sudden change”, says Andrew Bailey, chief executive of the Financial Conduct Authority in Britain. “By having a date by which transition will need to be complete, however, we give market participants a schedule to plan to, and make it easier for them to engage as many counter parties and Libor users as is practicably possible in that planning.”

How will the outstanding $1.33 trillion of mortgages affected once LIBOR goes away? Nobody knows yet.