LIBOR stands for London Interbank Offered Rate.

It is the level of interest that banks use when lending to each other and LIBOR is set every day in London by the British Bankers Association.

Whilst LIBOR is set daily, there are different rates for different maturing periods from next day (known as the overnight rate) to a loan period of 6 distant. Each rate is set daily. On top of this, there are 15 different currencies in which monies lent are subject to LIBOR including the main economies such as USA, Euro, The Pound Sterling, etc.

A LIBOR mortgage is usually set to the 6 month LIBOR rate and an additional % rate will be added to this LIBOR rate. This is generally the rate the borrower would pay.

For example, if you wanted to calculate your LIBOR rate you first need to establish which rate you are borrowing on. In the UK, for mortgages, this might be the 6 month Sterling LIBOR. Your mortgage might state that you will be paying a low rate of say 2.15% and that after 18 months it will revert to 2% above LIBOR. Therefore, at the end of the fixed rate period, if LIBOR on that day for your loan currency is say 1.035, then you would be charged interest at a new rate of 3.035 (2% + 1.035%).

LIBOR is the rate at which banks lend to each other and is only usually used for mortgages which involve an element of business lending. Of course, this is all dependent on the rate used for your loan and the terms of your loan. Therefore, it’s wise to take advice before entering into a new loan.

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