Libor rates in the UK are currently set each day via a process that is managed by the an organisation called Intercontinental Exchange Benchmark Administration. A survey is sent to a panel of the largest banks each day, asking what rates they are able to borrow at from other banks over different time periods. The highest and lowest four rates are discounted, and the rest are averaged to give the Libor rate.
Many mortgage rates are determined by Libor rates, as one of banks’ main sources of funding is borrowing from other banks.
Commercial and buy-to-let mortgages are often pegged directly to Libor, although some residential mortgages are also linked to Libor, especially those specialising in customers with adverse credit.
The Libor fixing scandal, which emerged in the summer of 2012, could mean that people whose mortgages are linked to Libor were mis-priced. It is not yet clear whether this would have been to their benefit or detriment, and there are investigations ongoing into the rate fixing scandal.
Although most residential mortgages track the Bank of England base rate, some will follow Libor (London Inter Bank Rate) instead. This is the rate at which banks lend to each other and it can vary day to day, so there is more movement in it than the base rate.
A Which? Mortgage Adviser will be able to talk to you about the possible benefits and drawbacks of opting for a Libor mortgage. But you may prefer to opt for a tracker mortgage or another type of variable rate or a fixed rate mortgage deal instead.