What does a negative LIBOR rate mean

LIBOR

definition

The LIBOR (London Interbank Offered Rate) is the average interest rate at which first class commercial banks can borrow money from other first class commercial banks. It is also known as the "interbank interest rate".

background

The LIBOR (often in lower case: Libor) is an average reference interest rate in the interbank business, at which various international banks in London offer time deposits. LIBOR rates can therefore also be understood as asking rates. A LIBOR comes about when all banks involved report their interest rates for money market loans to the Thomson Reuters agency every working day. These reported interest rates are “expected interest rates” for corresponding terms. The calculation is carried out in accordance with Thomson Reuters regulations on the basis of the interest rates communicated by these international panel banks. Since the highest and lowest 25 percent of the interest rates are not taken into account, only the middle 50 percent of the interest rates are included in the calculation. The LIBOR calculation result can also be negative. That is, the bank granting the loan has to pay the borrower bank a fee. The LIBOR is calculated for the following terms: one day, one week, one month, two months, three months, six months and 12 months. The five main LIBOR currencies defined are taken into account: euro, US dollar, Swiss franc, Japanese yen and British pound sterling.

The LIBOR mortgage model

As a base rate, LIBOR also has a direct impact on products for private customers such as mortgages and savings accounts. With the Swiss LIBOR mortgage model, which is also called LIBOR, money market or rollover mortgage, the interest rate is based on the LIBOR interest rate. In Switzerland, mortgage products are usually offered that are based on the LIBOR terms of three and six months. The interest rate for a LIBOR mortgage is made up of the LIBOR interest rate and an additional margin for the mortgage provider. The amount of the margin differs depending on the provider and depends on the creditworthiness of the mortgagee. In Switzerland, a negative LIBOR is usually not added to the margin, but the margin is simply offset.