Cessation of LIBOR as reference for mortgages.
Discussion
The key difference is that LIBOR is forward-looking – it is agreed at the start of an interest period. SONIA is backward-looking – it cannot be determined until the end of an agreed interest period. This means that borrowers will no longer have upfront certainty about the amount of their interest payments, and will require relatively last-minute calculations of the interest due.
Will SONIA based loans be cheaper? Probably not. Lenders will want the same “all in” interest rate return. SONIA is lower than LIBOR because it does not include the credit/liquidity risk premium noted above. Lenders are therefore likely to increase the margin or add a “credit adjustment spread” to cover the difference.
Borrowers can draw comfort from SONIA historically being less volatile (and usually lower) than LIBOR and tracking the Bank of England base rate very closely.
https://www.stevens-bolton.com/site/insights/brief...
Will SONIA based loans be cheaper? Probably not. Lenders will want the same “all in” interest rate return. SONIA is lower than LIBOR because it does not include the credit/liquidity risk premium noted above. Lenders are therefore likely to increase the margin or add a “credit adjustment spread” to cover the difference.
Borrowers can draw comfort from SONIA historically being less volatile (and usually lower) than LIBOR and tracking the Bank of England base rate very closely.
https://www.stevens-bolton.com/site/insights/brief...
Louis Balfour said:
We've just had a letter from Paragon saying that LIBOR is going to cease next year for the purposes of retail lending. For all lenders.
What impact is this likely to have?
Likely none at all.What impact is this likely to have?
Do you actually have a mortgage linked to LIBOR? If so it’ll be transferred to referencing the new rate, with an adjustment on the spread to account for the basis between the two rates.
rockin said:
The key difference is that LIBOR is forward-looking – it is agreed at the start of an interest period. SONIA is backward-looking – it cannot be determined until the end of an agreed interest period. This means that borrowers will no longer have upfront certainty about the amount of their interest payments, and will require relatively last-minute calculations of the interest due.
Will SONIA based loans be cheaper? Probably not. Lenders will want the same “all in” interest rate return. SONIA is lower than LIBOR because it does not include the credit/liquidity risk premium noted above. Lenders are therefore likely to increase the margin or add a “credit adjustment spread” to cover the difference.
Borrowers can draw comfort from SONIA historically being less volatile (and usually lower) than LIBOR and tracking the Bank of England base rate very closely.
https://www.stevens-bolton.com/site/insights/brief...
It’s normal on some overnight swaps to take the peripenultimate fix and apply it for the last three fixes, meaning that you know the coupon amount two days before it’s due to be paid.Will SONIA based loans be cheaper? Probably not. Lenders will want the same “all in” interest rate return. SONIA is lower than LIBOR because it does not include the credit/liquidity risk premium noted above. Lenders are therefore likely to increase the margin or add a “credit adjustment spread” to cover the difference.
Borrowers can draw comfort from SONIA historically being less volatile (and usually lower) than LIBOR and tracking the Bank of England base rate very closely.
https://www.stevens-bolton.com/site/insights/brief...
This is how Fed Funds swaps in London trade, as otherwise you’d only know the coupon after the end of the day in which it was to be paid.
It’d make sense to do similar on SONIA mortgages.
Kent Border Kenny said:
It’s normal on some overnight swaps to take the peripenultimate fix and apply it for the last three fixes, meaning that you know the coupon amount two days before it’s due to be paid.
This is how Fed Funds swaps in London trade, as otherwise you’d only know the coupon after the end of the day in which it was to be paid.
It’d make sense to do similar on SONIA mortgages.
It’s a bit of a surprise to see LIBOR on a retail loan... This is how Fed Funds swaps in London trade, as otherwise you’d only know the coupon after the end of the day in which it was to be paid.
It’d make sense to do similar on SONIA mortgages.
As you say, there are different approaches that could be taken - I don’t think the market has quite agreed on which one to use. Lockout period, look-back period, or just deferred settlement - we’re having to support these three options in the software I look after as we don’t (yet) know what will become the standard, and if we wait for it to emerge we won’t have time to write the code.
After all this, it may even turn out that market practice will be to derive a term rate from the historic ARRs, and all the systems can continue as though nothing’s changed.
DanL said:
It’s a bit of a surprise to see LIBOR on a retail loan...
As you say, there are different approaches that could be taken - I don’t think the market has quite agreed on which one to use. Lockout period, look-back period, or just deferred settlement - we’re having to support these three options in the software I look after as we don’t (yet) know what will become the standard, and if we wait for it to emerge we won’t have time to write the code.
After all this, it may even turn out that market practice will be to derive a term rate from the historic ARRs, and all the systems can continue as though nothing’s changed.
In Euro there is Eoniaindex, a periodic fixing which sets on the expectation of the EONIA rate over the following three months. That’s one possible route to keep things easy to deal,with.As you say, there are different approaches that could be taken - I don’t think the market has quite agreed on which one to use. Lockout period, look-back period, or just deferred settlement - we’re having to support these three options in the software I look after as we don’t (yet) know what will become the standard, and if we wait for it to emerge we won’t have time to write the code.
After all this, it may even turn out that market practice will be to derive a term rate from the historic ARRs, and all the systems can continue as though nothing’s changed.
Kent Border Kenny said:
In Euro there is Eoniaindex, a periodic fixing which sets on the expectation of the EONIA rate over the following three months. That’s one possible route to keep things easy to deal,with.
Indeed, and it sorts out one currency. I think USD and GBP (and probably JPY) will go the same way at some point, but I seem to recall the Swiss saying they weren’t going to do this a while back. If they changed their minds (and the other currencies got a bloody move on) it’d make my job easier! 
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