LIBOR stands for the ?London Interbank Offered Rate,? which is a reference rate calculated daily from the different interest rates banks use to lend unsecured funds to each other. The LIBOR is used as a reference for several functions, with variable rate mortgages and currency exchange being probably the most important to the average person.
However, those working in the world of finance now question ?the validity of LIBOR as a credible market benchmark,? according to David Oakley in his article Reluctance to lend cash keeps heat on LIBOR on FT.com. Currently, ?interbank lending rates have stayed? high.? Recently, the LIBOR rates were around 70 points above base rates, when ?before the credit crisis, they traded around 10 basis points above official rates.?
LIBOR loans, then, generally refer to the variable rate mortgages previously mentioned, and according to The Institute for Luxury Home Marketing, are still ?one of the most sought-after loans in today?s economic environment.?
LIBOR loans are interest-only, variable rate mortgage loans, which means that you only pay interest during a certain amount of time, for up to ten years, equalling a lower monthly payment. This frees up more capital during that time period for other purchases. In addition, several LIBOR loans offer attractive options, such as no early repayment penalty. Related to that last point, LIBOR loans, due to being interest-only, offer the option of overpaying and applying the remainder to the principal. This, in turn, shortens the life of the loan.
What is the future of the LIBOR loan? David Oakley, in the same article, suggests that ?only when the banks have repaired their balance sheets and loans are shifted off their books will there be more cash for interbank lending? This is essential if rates are to fall back to pre-crises levels,? and if LIBOR loans are to be economically viable and helpful to the general public.