Variable rate

Definition

A variable rate is an interest rate on borrowing that is not fixed for the whole term and can rise or fall over time. It usually moves because it is pegged to a reference rate — most commonly the Bank of England base rate — plus a fixed margin set by the lender. When the benchmark changes, your rate, and therefore your repayments, change with it.

In plain terms

A variable rate has two parts: a moving benchmark and a fixed margin. If the base rate is 4.5% and your lender's margin is 6%, your variable rate is 10.5%. Should the Bank of England lift the base rate to 5%, your rate becomes 11% — the margin stays put, the benchmark moves. (Figures here are illustrative, not a quoted Credicorp rate.)

The opposite is a fixed rate, which stays the same for the agreed term regardless of what the wider market does. A fixed rate buys certainty; a variable rate exposes you to the benchmark in both directions — cheaper if rates fall, dearer if they rise.

Where you'll meet variable rates

Variable pricing is common on revolving facilities, overdrafts and many flexible working-capital products, because they are designed to flex with usage and the rate environment. Longer-term and asset-backed loans are more often fixed, though plenty offer a variable option.

Some products quote a single simple fee rather than a moving rate at all. A flexible facility like Credicorp Flex charges only for the funds you actually draw, so understanding exactly how the cost is calculated — variable, fixed or fee-based — matters more than the headline label.

Why it matters to your business

A variable rate puts part of your borrowing cost outside your control. In a rising-rate environment, repayments can climb mid-term, squeezing cash flow you had budgeted tightly. In a falling environment, you benefit automatically without refinancing. The question is how much rate uncertainty your cash flow can absorb.

For short-term facilities the exposure is limited — over a few months, even a benchmark move has little time to compound. Over longer terms it matters far more, which is why directors planning multi-year borrowing should stress-test repayments against a higher rate before committing.

An example

A logistics firm takes a £100,000 facility at base rate plus 5%. At drawdown the base rate is 4.5%, so it pays 9.5%. Six months in, the Bank of England raises the base rate twice to 5.25%, lifting the firm's rate to 10.25%.

On £100,000 that is roughly £750 a year of extra interest — manageable here, but a useful reminder. The finance director had modelled repayments at 11% before signing, so the increase was already inside the budget. Stress-testing turned a surprise into a non-event.