A floating rate is a variable interest rate that moves up and down in response to the movements of a market index. It is most often used in reference to bonds and other debt instruments and can be found in both corporate and government debt. The floating rate is the rate of interest paid on a loan that fluctuates over time. The interest rate is based on an underlying index such as the London Interbank Offered Rate (LIBOR) and is usually expressed as a margin above or below that index.
The main advantage of a floating rate for the borrower is that it offers protection against increases in interest rates. If rates rise the interest payments on the debt will not increase as much as they would with a fixed rate loan. For this reason floating rate debt is often used by companies who are concerned about rising interest rates.
The main disadvantage of floating rate debt is that it exposes the borrower to the risk of falling interest rates. If rates fall the interest payments on the debt will decrease which may put the borrower in a difficult financial position.
Floating rate debt is often referred to as variable rate debt or adjustable rate debt.
What is a floating rate?
A floating rate is an interest rate that moves up and down in response to changes in the market interest rates.
What are the benefits of a floating rate?
The main benefit of a floating rate is that it gives you the opportunity to take advantage of lower interest rates when they are available.
What are the risks of a floating rate?
The main risk of a floating rate is that you could end up paying more interest if market rates rise.
What is the difference between a floating rate and a fixed rate?
A floating rate will move up and down in response to changes in market interest rates while a fixed rate will stay the same over the life of the loan.
Should I get a floating rate or a fixed rate loan?
It depends on your personal circumstances and your tolerance for risk.
If you think interest rates are going to fall then a floating rate loan could be a good option.
However if you are worried about interest rates rising then a fixed rate loan may be a better choice.
How often do floating rates change?
Floating rates can change at any time in response to changes in market interest rates.
I have a floating rate loan.
How will I know if rates go up or down?
Your lender will usually notify you in writing if there are any changes to your interest rate.
What happens if I can’t afford the new payments if rates go up?
If you can’t afford the new payments you may be able to negotiate with your lender to try and get a lower rate.
However if you can’t reach an agreement you may have to sell your property.
How do I compare floating rates?
When comparing floating rates you need to look at the interest rate plus any fees and charges.
You also need to consider how often the interest rate can change and how much it can change by.
What are the interest rates like on floating rate loans?
Interest rates on floating rate loans can be higher than on fixed rate loans because there is more risk for the lender.
Should I lock in my rate?
If you think interest rates are going to fall then you may want to consider a floating rate loan.
However if you are worried about interest rates rising then you may want to lock in your rate with a fixed rate loan.
What is a rate lock?
A rate lock is when you and your lender agree on an interest rate for your loan and the rate is locked in for a set period of time.
How long can I lock in my rate for?
It depends on the lender but most rate locks are for between 30 and 90 days.
What happens if rates go up while my rate is locked in?
If rates go up while your rate is locked in you will still pay the lower locked-in rate.
What happens if rates go down while my rate is locked in?
If rates go down while your rate is locked in you may be able to negotiate with your lender to get a lower rate.
However if you can’t reach an agreement you may have to pay a break fee.