PIL Petersfield

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The mortgage market’s switch from LIBOR to SONIA

If your mortgage is linked to a “benchmark index rate” it was most likely in the past to be either the Bank of England’s Base Rate or LIBOR: London Interbank Offered Rate (LIBOR), which has acted for decades as the main reference rate for financial products globally, including loans, derivatives and bonds.

It’s based on the average at which large global banks would lend funds to each other and is commonly calculated in seven maturities across five currencies.

Discussions about finding a replacement rate have continued for several years, driven largely by the controversy that ignited when it emerged that LIBOR had been manipulated by several banks.

The scandal came to light fully in 2012. By 2018, the Financial Conduct Authority (FCA) confirmed that LIBOR would be phased out by the end of 2021. The regulator asked market participants to begin considering how they would transition to a new rate.

The big question that emerged was ‘what should the new reference rate be?’ Hundreds of trillions of pounds of financial assets around the world are linked to LIBOR and many legacy contracts do not provide for what happens if the benchmark ceases to be published.

Enter: SONIA – The Sterling Overnight Index Average (SONIA) was put forward as a replacement for LIBOR.

SONIA differs from LIBOR in a number of ways. It is based on actual transactions and is not set, currently, in different maturities. SONIA reflects the actual average interest rates that banks pay to borrow sterling overnight from other institutions, unlike LIBOR which is forward looking.

Some mortgage customers may be impacted by this change, as a number of lenders have reversionary rates that are tied to LIBOR and which will need to be replaced by a new benchmark.

Some institutions are moving to the Bank of England (BoE) base rate with which customers are generally familiar.

Therefore the transition from LIBOR should, in practice, represent a change in the calculation of customers’ mortgage rate, rather than a change in the rate itself.

If you are concerned about how your interest rate might be affected by this change, either call your lender or e-mail:

mortgages@pilpetersfield.co.uk

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Probate fee structure is changing

The probate fee structure is changing, and for many it won’t be for the better. Fees charged for probate – which allows legal control over a deceased’s estate – are currently fixed at £215 – or £155 for families who use a solicitor.

But the Government announced that the charges will be linked to the size of the estate.

Under the proposed new system, estates valued at more than £2m will now pay £6,000, while those worth between £1.6m and £2m will pay £5,000 and those between £1m and £1.6m £4,000.

Estates worth between £500,000 and £1m will have to find £2,500, while those in the £50,000 to £300,000 price bracket will pay a more affordable £250. Those valued at less than £50,000 will be exempt compared with the current and lower threshold of £5,000.

According to estimates, one in five families who pay fees will need to find at least £2,500.

Funding these higher costs could also prove a challenge for executors.

Probate fees paid upfront

Aside from the soaring costs, executors will also have to pay the fee up front before reclaiming it from the estate once probate has been granted.
Some families will be left no choice but to borrow to be able to foot the bills.

Although these fees are lower than those proposed by the Government in 2017, when bills were projected to rise as high as £20,000, they till need to be funded.

Call us to discuss a low cost and tax efficient way of ensuring your estate’s representatives have the cash available at a difficult time.

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