LIBOR transition FAQs
The Frequently Answered Questions below will answer your questions about our transition.
The Bank of England and the Financial Conduct Authority have announced that the external reference rate known as “LIBOR” will no longer be able to be used from the end of 2021. They want all lenders to stop using LIBOR and move all LIBOR loans onto an alternative reference rate. You can find out more about the end of LIBOR on the Bank of England and Financial Conduct Authority websites:
· https://www.fca.org.uk/markets/libor
· https://www.bankofengland.co.uk/markets/transition-to-sterling-risk-free-rates-from-libor
The Frequently Answered Questions below will answer your questions about our transition.
The London Interbank Offered Rate, also known as LIBOR, is based on the average interest rates at which leading banks lend to one another over different periods (for example over 3 months, which is known as 3-month LIBOR). LIBOR is used by lenders when calculating interest rates for a range of financial products including mortgages.
LIBOR is ceasing because international regulators no longer see it as sufficiently reliable, transparent, independent or representative to use as a benchmark interest rate. The Financial Conduct Authority (FCA), which regulates financial markets in the UK, has confirmed that the use of LIBOR in the UK should be phased out by the end of 2021.
If you have a Vida Homeloans Buy to Let mortgage where the interest rate you pay now, or the interest rate you will pay at the end of your fixed rate period, is calculated by reference to LIBOR, then this will need to move to an alternative reference rate.
If the interest rate you pay now, or the interest rate you will pay at the end of your fixed rate period, is linked to a variable rate, such as Vida Variable Rate, then your mortgage rate does not directly reference LIBOR. However, we currently consider a range of factors when setting our variable interest rates, including external reference rates such as LIBOR and the Bank of England Base Rate. After the end of 2021, LIBOR will not be included in this consideration.
This will be set out in your offer letter. Some of our mortgages have interest rates that directly reference LIBOR (“tracker mortgages”) and some pay a rate that reference LIBOR after the end of their initial fixed rate period.
We no longer offer new LIBOR-linked loans. Your mortgage adviser will be able to give full details of the products we have available.
No. All mortgage lenders are required to offer non-LIBOR products from October 2020 and to stop lending new LIBOR mortgages by the end of March 2021. Lenders are required to proactively move all mortgages which reference LIBOR and mature after December 2021 onto an alternative interest rate.
We will write to you to tell you the date (your “LIBOR Replacement Date”) that we will move your mortgage to the LIBOR Replacement Rate. We will give you at least eight weeks advance notice of the change.
If your LIBOR Replacement Date occurs when you are still on a fixed rate, you will continue to pay the fixed rate until the end of the fixed rate term. The LIBOR Replacement Rate will apply afterwards.
Although we know that LIBOR will continue to be published until the end of 2021, the FCA wants mortgage lenders to act as soon as possible. We plan to move our mortgages in stages between December 2020 and December 2021 to ensure a smooth change for our customers by the end of 2021.
If you have more than one Vida Homeloans mortgage linked to LIBOR, they may move at the same time or they may move at a different date. You will get a separate letter for each mortgage that is changing with details of the LIBOR Replacement Date that will apply to that mortgage.
Our LIBOR-linked mortgages pay an interest rate of 3-month LIBOR plus a product margin. This will move to the LIBOR Replacement Rate plus the product margin.
The LIBOR Replacement Rate will be calculated as the sum of the Bank of England Base Rate (“BBR”) plus a Rate Adjustment. The Rate Adjustment will be fixed in advance of the LIBOR Replacement Date and will apply for the remaining term of your mortgage. We have explained how the LIBOR Replacement Rate will be calculated and what this means for you below.
The Bank of England Base Rate (“BBR”), sometimes referred to as the ‘bank rate’ or ‘base rate’ is the interest rate that the Bank of England pays to Banks that deposit cash with them. It is widely used across the financial services sector including for setting interest rates on savings, loans and mortgage products.
BBR is set by the Bank of England’s Monetary Policy Committee, which meets regularly to discuss if BBR should go up or down. BBR is published on the Bank of England’s website at https://www.bankofengland.co.uk/
We want to keep this simple and to introduce a new rate that is fair and transparent. We looked at different rates and decided that BBR was the most familiar to customers and already widely used across the mortgage market, enabling customers to easily compare our mortgage products and pricing with others available in the market. BBR, like LIBOR, is an ‘externally set’ rate, meaning that it is not set by us.
LIBOR and BBR are calculated differently. LIBOR is based on the average interest rates at which leading banks lend to one another. BBR is the interest rate that the Bank of England pays to Banks that deposit cash with them. This is less risky so BBR is (on average) expected to be lower than LIBOR. The Rate Adjustment takes account of this difference and ensures that your mortgage continues to perform in the way that you expect.
We have calculated the Rate Adjustment as the average difference between BBR and 3-month LIBOR over the five-year period ending on the month end at least 3 months before your LIBOR Replacement Date. For example, if your LIBOR Replacement Date is 21 December 2020, the averaging period is from 1 September 2015 to 31 August 2020. We have used the “median” average rather than the “mean” average. We have adopted an approach which we believe aligns with emerging market consensus. The median average is slightly lower than the mean average which will benefit you. The Rate Adjustment will be fixed from the date your mortgage moves to the LIBOR Replacement Rate.
All Vida Homeloans LIBOR mortgages are subject to a 0.25% LIBOR floor. This means no matter how far LIBOR reduces, the interest rate on your loan is calculated using a minimum value for LIBOR of 0.25%. Once your loan has moved to the new interest rate a floor of 0.25% will apply to the LIBOR Replacement Rate. We have provided an illustration of how this will operate below. All other terms in your mortgage which state how your interest is calculated will stay the same. This means:
· The rate will be calculated quarterly on 12th March, June, September and December
· The new rate will start from 1st April, July, October and January
· The rate will be rounded up to the nearest 0.05%
· Interest will be applied on a daily basis to the capital balance outstanding.
This depends on movements in BBR between now and your LIBOR Replacement Date. BBR, like LIBOR, is a variable rate. BBR may rise or fall in the future and a rise in BBR may result in an increase in your monthly payments.
We have provided an example based on LIBOR and BBR as at 1 September 2020, a Rate Adjustment of 0.08% and a Product Margin of 5.00%. The actual values relevant to your mortgage will be provided in your personalised letter.
| Current rate | New rate | |
|---|---|---|
| Applicable externally set interest rate | 3-month LIBOR published by Intercontinental Exchange | Bank of England Base Rate published by Bank of England |
| Applicable rate (as at 1 September) | 0.204% | 0.100% |
| Rate Adjustment (notified at LIBOR replacement) | n / a | 0.08% |
| LIBOR Replacement Rate | n / a | 0.18% |
| Rounded up | 0.25% | 0.20% |
| Interest rate floor | 0.25% | 0.25% |
| Product margin | 5.00% | 5.00% |
| Rate you pay | 5.25% | 5.25% |
As the FCA has confirmed that use of LIBOR in the UK should be discontinued by the end of 2021, we have no choice but to make changes to your mortgage.
We are changing the terms of your mortgage under Term 21.6(b) of your Mortgage Conditions which allows us to make changes if it is reasonable to do so to as a result of changes beyond our reasonable control in the banking or financial system.
We believe these changes are reasonable, are fair to you, will not result in you paying (on average) a higher rate that you do at the moment and will not impose any terms on you which are less beneficial to you compared to your current terms.
We are doing everything we can to make this move as seamless as possible.
No, we will not charge you any fees to move your mortgage to a replacement rate. If you decide to discuss your options with your mortgage broker or financial advisor, you will be responsible for their fees.
Your obligations as Guarantor will continue and apply to the Vida Homeloans mortgage agreement, as varied. Your obligations as Guarantor are not released nor diminished by the variation of the agreement.
If you are happy with these changes, you do not need to do anything. We are writing to you in October with a Notice of Variation which will give effect to the changes to the terms of the mortgage. If you’re not happy, we’re really sorry to hear that. Unfortunately, we can’t change any of these terms, but you have the right to repay the mortgage at any time. If you repay the mortgage after the end of the fixed rate period you will not have to pay an early repayment charge. If you would like any more information or would like to discuss further, please give us a call on 0344 892 0155 or send us a message through your online mortgage portal.
The Notice of Variation sets out the changes to the Vida Homeloans Buy to Let Mortgage and Loan Terms and Conditions. This is included in the Documents section of our website. For Borrowers in Scotland, the changes are also recorded in a legal document signed by us called a “deed of variation” which was registered in the Books of Council and Session on 8 October 2020.
Please call us as soon as possible on 0344 892 0155 if you are likely to experience difficulties in maintaining your mortgage payments. If you already have an Agreement To Pay in place your move to the LIBOR Replacement Rate will not change that.
If we have agreed a payment holiday with you, you do not need to pay some or all of your usual monthly mortgage. Interest is still added to your mortgage balance. The amount of this interest will be calculated from the LIBOR Replacement Date using the LIBOR Replacement Rate but your payment holiday will be unchanged.