How to Calculate Standard Variable Interest Rates

When applying for a home loan, you may choose a fixed loan rate (the interest rate does not change for the life of the loan), a standard variable loan rate (the loan rate is subject to change), or a capped loan rate (the rate is subject to change, but the potential will not exceed a set percentage). Using a simple calculation, you can compute your loan's standard variable interest rate after it is adjusted.

Instructions

1. Find out the current index rate, which is a general cost of lending money to a financial institution. Visit the Federal Home Loan Bank's website to learn the Cost of Funds Index (COFI), which is the base for calculating many variable rate loans. This number represents the current index rate. Some variable rate loans are pegged to a different index rate, rather than COFI; check with your lender or read through your loan's paperwork to find out.

2. Figure your lender's margin rate, which you can only determine by asking or checking your loan paperwork. Your lender adds a margin to the index rate to make a profit off the loan.

3. Add the index rate and the margin rate. For instance, if the index rate is recorded at 4 percent and the margin rate applied is 2 percent, then the standard variable rate is 6 percent. The margin rate remains constant; however, the standard variable rate changes when the index rate changes. Some banks offer a cap on how much a standard variable rate can climb within one year.

4. Repeat your calculations when the index rate changes.

Tips & Warnings

• Your standard variable interest rate may or may not change each month, depending on the terms of your loan and whether the index rate has moved.

References

• Federal Reserve: The Federal Reserve Board