The Financial Conduct Authority (FCA) has announced that, from 2021, it will no longer use LIBOR as a benchmark. The LIBOR rate affects the cost that financial organisations pay to raise the money they use to provide loans. Most variable rate commercial mortgage interest rates are tied to the LIBOR rate and fluctuate according to the current state of the LIBOR.
There has been no announcement of what will replace the LIBOR rate. This has created uncertainty about the future cost of commercial mortgages and other loans currently based on the LIBOR rate. Lenders and borrowers will lobby the FCA to suggest new options. Ideally, a new index will be acceptable to both sides.
The five-year period before the FCA leaves the LIBOR rate means that current commercial mortgages should be unaffected by the FCA announcement for now. Many commercial mortgage documents specify that the lender can substitute another index if the LIBOR ceases to reflect the true cost of raising money. An alternative index could be higher than the LIBOR though, which would make interest rates more expensive.
Hopefully, before 2021, a new index will be established that will make it easier to predict how interest rates will fluctuate. Some lenders may implement a new index on their loans before the 2021 deadline.
Many financial organisations are looking at the issues around leaving the LIBOR rate and a new index may be established soon so that borrowers have more certainty about how much interest they will pay on future commercial mortgages.