Variable Interest Rates in Relation to Home Loans

What is a variable interest rate?

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A variable interest rate is one that can go up or down based on an index. A variable interest rate comprises an index rate and a margin rate.

The index rate is the lender's cost of borrowing from the market. It’s represented by a recognized market indicator like the LIBOR, federal funds rate, or treasury bills. The margin is determined by the lender and caters for the loan’s risk profile and the lender’s desire for profit. The margin doesn’t change during the loan term—the index is what may rise or fall, which makes the variable interest rate change.

A variable interest rate only changes at predetermined periods (monthly, quarterly, annually, every two years etc.). These periods are known as “resets.”

If you’d like more information on variable interest rates, and how they can work for you, please fill out the form below and a specialist will get in touch.