Variable Rate
An interest rate that can change during the loan term, typically linked to a benchmark rate such as SONIA or the Bank of England base rate.
A variable rate is an interest rate that can change over the life of a loan in line with movements in a benchmark rate - most commonly SONIA (Sterling Overnight Index Average) or the Bank of England base rate. When the benchmark rises, the rate on a variable-rate loan rises; when it falls, the rate falls.
Variable rates are common in invoice finance, revolving credit facilities, and many commercial property loans. They offer the potential benefit of falling rates in a declining rate environment, but they create uncertainty around future repayment costs. Businesses with tight margins may prefer the certainty of a fixed rate even if variable rates are currently lower.
A typical variable-rate pricing structure is SONIA + a margin. For example, SONIA + 3.5% per annum. As at June 2026, SONIA approximately tracks the Bank of England base rate (4.25%), so the effective rate in this example would be approximately 7.75% per annum. As SONIA moves, the effective rate changes accordingly.
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