How will the move from Libor to Sonia affect mortgage rates and advice?

"There remain unanswered questions on the potential price differentials for default variable rates, as well as whether any adjustments to maintain pay rates will be compulsory or voluntary"

The AMI is urging lenders to communicate their plans on the move from Libor to Sonia to intermediaries as soon as possible, as brokers continue to write new business on Libor-linked products.

Following the Libor scandal and consequent Wheatley Review of 2012 which concluded that the widely-used benchmark rate had been manipulated, the Bank of England and FCA have signalled that banks must move away from using the London Interbank Offered Rate from 2021.

In its place will be Sonia, the Sterling Overnight Index Average, the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market.

Market estimates suggest around $350 trillion worth of financial contracts are underpinned by Libor globally, including mortgages, and all contracts will need to be rebased from Libor to the new reference rate.

In its quarterly bulletin, the AMI said there remains "something of a question mark" over the transitioning of existing contracts from Libor-linked rates to Sonia-linked rates.

Sonia tends to be lower than Libor – as well as based on a larger volume of transactions carried out at observable rates – raising implications for the switch of existing contracts.

Some lenders have reported a decision not to wait for the new Sonia regime and have instead, already started to link new mortgage product pricing to Bank Base Rate.

The AMI says how this transition will affect customers across residential, commercial and buy-to-let markets remains uncertain.

In its bulletin, the AMI said: "The price differential for existing customers whose mortgages will have to see a switch is therefore, as yet, unknown. According to one lender, it’s possible to adjust the price differential so that pay rates remain unchanged – particularly during the product term. There remain unanswered questions on the potential price differentials for default variable rates, as well as whether any adjustments to maintain pay rates will be compulsory or voluntary on the part of lenders."

The AMI has raised concerns that brokers are continuing to write new business on Libor-linked products without receiving any communication from lenders about the transition to Sonia.

The Association has warned that this could lead to accusations of incomplete advice to arise against brokers advising on regulated mortgage contracts in future.

It is advising brokers to include wording within advice contracts that covers this set of circumstances "to cover off the risks of lenders not transferring quickly to new alternative rates".