End of Libor ‘will have little impact on mortgage market’

End of Libor ‘will have little impact on mortgage market’

The abolition of the Libor rate is likely to have little impact on the mortgage market, according to a leading mortgage expert.

Chief executive of the Financial Conduct Authority Andrew Bailey confirmed on Thursday (27 July) that Libor, which is used to price $350tn-worth of mortgages, loans and other transactions, would be phased out by 2021 and replaced by a new benchmark following a transition period.

It follows a string of high-profile scandals in which the rate was manipulated by traders to boost their institutions’ profits.

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While it is not yet clear what the alternative rate will be, Mr Bailey indicated the Sterling Overnight Index Average could serve as a new benchmark.

Ray Boulger, senior technical manager at London-based John Charcol, said the move was likely to have “very little impact on the mortgage market”.

“There are a very small proportion of mortgages that are Libor-linked. In the mainstream market, the majority at the moment – 80 to 85 per cent - are fixed rate, while the rest are linked to either the bank rate or SVR. Very few are directly linked to Libor.

“All the indications are that the new rate is going to be aimed at exactly the same objective but based on actual transactions.

“Looking ahead a few years, it will make the system more robust. That might improve liquidity. It has to be a positive move.”

Mr Boulger added that the small number of Libor-linked loans that currently exist – mainly at the specialist end of the market – have clauses in their contracts that ensure they would be based on the new rate.

He said he expected a “pretty smooth transition” to the new rate and there would not be a significant impact on retail customers.