One of the essential tips for buying a house with a mortgage (KPR) is understanding the key terms that often come up during the application process, such as the floating rate. Unfortunately, this term is still unfamiliar to many people, even though it has a significant impact on the monthly installments that must be paid.
So, what exactly is a floating rate? How does it differ from a fixed rate, and how is it calculated? Let’s explore the details below!
What Is a Floating Rate?
A floating rate is a type of interest rate that can change according to a reference index, such as market interest rates or the central bank’s benchmark rate. This means that the amount of interest payable or receivable is not fixed throughout the loan or investment period.
Floating rates are commonly applied to financial products such as loans, bonds, or deposits, which are tied to benchmarks like the BI Rate or LIBOR (London Interbank Offered Rate) plus a certain margin. For example, if the reference index rises, the floating rate will also increase. Conversely, if the index falls, the floating rate will decrease.
Generally, floating rates are used in investment and loan products. In investments, this type of interest is often applied to floating rate bonds. Meanwhile, in lending, floating rates are most commonly applied to mortgage products (KPR) where the interest rate follows market fluctuations.
Differences Between Floating Rate and Fixed Rate
It’s important to understand the differences between floating and fixed rates before choosing one for a loan or investment, as each has its own characteristics, benefits, and risks.
1. Nature of Interest Rate Changes
As explained earlier, floating rates change in line with market benchmarks, meaning they can rise or fall periodically. In contrast, fixed rates remain unchanged during the agreed period, ensuring consistent monthly installments or returns.
2. Determination Mechanism
Floating rates are calculated based on the benchmark interest rate plus a certain margin. If the benchmark changes, the total interest payable also changes. On the other hand, fixed rates are determined at the start of the agreement and remain unaffected by market fluctuations. This is similar to annuity interest, where monthly installments remain the same, although the composition of principal and interest varies over time.
3. Risks and Benefits
Floating rates can be advantageous when market interest rates fall, as they reduce the borrower’s interest burden. However, they can be detrimental when market rates rise. Fixed rates, meanwhile, provide certainty of payments in each period but may be less beneficial when market rates are declining.
How to Calculate Floating Rate
Calculating a floating rate essentially involves adding the benchmark interest rate to a predetermined margin (spread). The calculation is updated periodically according to the adjustment period, such as every 3 or 6 months.
General formula:
Floating Rate = Benchmark Rate + Margin (Spread)
Example:
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Loan principal: Rp100,000,000
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Benchmark rate (BI Rate): 5%
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Margin: 2%
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Total floating rate = 5% + 2% = 7% per year
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Annual interest = 7% × Rp100,000,000 = Rp7,000,000
Disclaimer: This example is for illustration purposes only. Actual calculations may vary depending on the type of loan and the financial institution’s policy.
Advantages of Floating Rate
The main advantage of floating rates is that there is usually no penalty fee for early repayment. In addition, when benchmark rates fall, the interest burden also decreases, offering potential savings for both investors and borrowers.
This type of interest is also considered more relevant to current economic conditions since it adjusts regularly to market developments. In the long run, floating rates can be highly beneficial if the trend of interest rates is declining.
Disadvantages of Floating Rate
Despite being more market-relevant, floating rates also carry disadvantages that need to be considered. The main risk is the potential for higher payments when benchmark rates rise, which increases the loan burden.
Periodic changes can also make financial planning less predictable, as the payable amount may vary in each period. Furthermore, fluctuations can create psychological pressure since borrowers or investors must continuously monitor interest rate movements.
A common question is whether interest continues to accrue on non-performing loans. The answer: once a loan is officially declared non-performing by a financial institution, no further interest may be added to the outstanding balance. Any additional interest charges after default have no legal basis.
Strategies to Manage Floating Rate Risks
Managing floating rate risks requires careful financial planning. Here are several strategies you can apply:
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Monitor benchmark interest rate movements and economic conditions to anticipate potential increases.
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Keep extra funds available to handle higher payments during rate hikes.
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For large corporations, use financial instruments such as interest rate swaps or other derivatives to hedge against rising rates.
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Choose longer adjustment periods, such as 6–12 months, to allow more time to adapt before rates change.
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Consider combining fixed and floating rates within your portfolio or loan to balance risks and opportunities.
Understanding the concept of floating rates can help you plan better financial strategies, whether for loans or investments. Although floating rates involve fluctuations, with proper planning, you can still take advantage of them to achieve your financial goals.
If you are considering financing with competitive rates and flexible tenors, BFI Finance is ready to be your trusted partner. With BFI Finance, you can apply for multipurpose financing with various collateral options, such as motorcycle BPKB, car BPKB, or house/shop certificates.
Moreover, BFI Finance is licensed and supervised by the Financial Services Authority (OJK), ensuring safe and fast loan applications. Fulfill your financial needs today, because #SelaluAdaJalan with BFI Finance.
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