Variable Rate

A variable-rate loan is usually priced as a benchmark rate plus a fixed margin. If the benchmark is 4% and the margin is 2%, the borrower pays 6%. If the benchmark later rises to 5%, the rate becomes 7%; if it falls to 3%, the rate becomes 5%.

This means repayments can go up or down. On a 200,000 mortgage, a rise of one percentage point can add more than a hundred to the monthly payment, which can strain a household budget.

Variable rates often start lower than fixed rates, because the borrower, not the lender, carries the risk of rising rates. They can be attractive when rates are expected to stay steady or fall, and they often allow more flexibility, such as extra repayments without penalties.

The main risk is uncertainty. Borrowers on variable rates should be confident they could still afford their payments if rates rose by a few percentage points. Savings accounts usually pay variable rates too, so savers benefit when rates rise and earn less when they fall.

Note: A floating rate means the same as a variable rate. "Floating" is more common for business loans and bonds; "variable" is more common for consumer products.