How to calculate floating interest rate
In the past 10 days, discussions about floating interest rates have continued to rise across the Internet, especially driven by topics such as adjustments to mortgage interest rates and changes in LPR (Loan Pricing Rate). Many netizens have become keenly interested in the calculation method of floating interest rates. This article will start with the definition, calculation formula, influencing factors and practical application scenarios of floating interest rates, and use structured data to help everyone clearly understand the calculation method of floating interest rates.
1. What is a floating interest rate?
Floating interest rates refer to loan interest rates that adjust as market benchmark interest rates change. Different from fixed interest rates, floating interest rates will be repriced according to the period agreed in the contract (such as monthly, annual). Common benchmark interest rates include LPR, LIBOR (London Interbank Offered Rate), etc. In China, personal housing loans mostly use LPR as the benchmark for floating interest rates.
| Interest rate type | Features | Applicable scenarios |
|---|---|---|
| fixed interest rate | The interest rate remains unchanged and the repayment amount is fixed | Short-term loans and market interest rates fluctuate greatly |
| floating rate | The interest rate adjusts with the base interest rate and the repayment amount changes | Long-term loans (such as mortgages), periods of declining market interest rates |
2. Calculation formula of floating interest rate
The calculation of floating interest rates is usually based on the following formula:
| components | illustrate | Example |
|---|---|---|
| Base rate (such as LPR) | Published regularly by central banks or market pricing agencies | The current LPR over 5 years is 4.2% |
| Add points (BP) | Fixed value determined by the bank based on customer qualifications (1BP=0.01%) | +50BP (i.e. 0.5%) |
| actual execution interest rate | Base rate + points | 4.2%+0.5%=4.7% |
3. Latest LPR data in 2023 (released in the past 10 days)
| the term | LPR interest rate | Adjustment range | Effective date |
|---|---|---|---|
| 1 year term | 3.55% | Same as last month | October 20, 2023 |
| More than 5 years | 4.20% | Down 10BP | October 20, 2023 |
4. Adjustment cycle of floating interest rates
According to central bank regulations and bank contracts, there are two main ways to adjust floating interest rates:
| Adjustment type | illustrate | Features |
|---|---|---|
| Adjustment the following year | Repriced based on the latest LPR on January 1 every year | Interest rate changes lag the market |
| Adjust monthly/quarterly | Follow LPR changes according to the contract period | Reflect market changes in a more timely manner |
5. Actual case: Calculation of floating interest rates for mortgage loans
Assume that Mr. Zhang applies for a 1 million yuan mortgage with a term of 30 years in October 2023, and the number of points added by the bank is +80BP:
| calculated item | numerical value | Remark |
|---|---|---|
| Current 5-year LPR | 4.20% | Released in October 2023 |
| Contract plus points | +0.80% | fixed |
| actual first year interest rate | 5.00% | 4.2%+0.8% |
| Monthly payment (equal principal and interest) | 5,368 yuan | Calculated based on 5% interest rate |
6. Three major influencing factors of floating interest rates
1.monetary policy orientation: The central bank affects the LPR quotation by adjusting the MLF interest rate;
2.market capital supply and demand: Interest rates may rise when liquidity in the inter-bank market is tight;
3.personal credit status: The higher the credit score, the lower the bank points usually.
7. Suggestions on choosing floating interest rate vs fixed interest rate
| Compare dimensions | floating rate | fixed interest rate |
|---|---|---|
| interest rate risk | Bear the risk of rising interest rates | Lock in an interest rate that is not affected by the market |
| cost advantage | Benefit when interest rates fall | Advantage when interest rates rise |
| Applicable people | Expected future LPR decline/short-term repayment | Pursue stability/long term loan |
Conclusion
Understanding how floating interest rates are calculated can help us make more informed choices when applying for loans. The recent reduction of LPR has made many mortgage borrowers pay attention to the issue of interest rate repricing. It is recommended to regularly check the LPR data released by the central bank and confirm the specific interest rate adjustment rules with the lending bank. In the context of increasing economic cycle fluctuations, flexible use of floating interest rates may save you considerable capital costs.
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