Lesson 2 of 20 · 6 min
Term two: the rate is variable and can move on its own
The interest rate can change without any matching change in your stated borrowing capacity.
The second term is that the rate is variable and can change without a corresponding change in anything else about your facility. In particular, a rate increase does not come with more capacity, more headroom, or any adjustment in your favour.
From Track 1 you know the rate is index plus spread. The term here is broader than that: it covers movement in the index, revision of the spread, and changes in how frequently the rate resets. Each is permitted, and none of them requires your agreement at the time it happens.
The reason this belongs in a list of terms that move without you is the asymmetry with capacity. A rising rate increases the balance faster, which raises the trigger value, which reduces headroom — while your borrowing capacity, set by advance rates on collateral, does not increase to compensate. The two sides of the facility are governed by unrelated mechanisms, and only one of them moved.
There is a compounding version worth noticing. If interest is not paid but capitalised, a rate increase raises the balance, which raises next period's interest, which raises the balance again. A rate that rises during a period when collateral is flat produces a measurable loss of headroom with no market event at all — the mechanism Track 4 lesson 14 quantified.
Key terms
- Variable rate
- A rate that changes over the life of the facility, driven by an index, by lender revision, or by both.
- Reset frequency
- How often the rate is recomputed. Daily or monthly resets mean the rate can change several times inside one statement period.
- Capacity
- The maximum you may borrow, set by advance rates on collateral. Governed separately from the rate and does not rise when the rate does.
Worked example
The rate rose; nothing else did
Balance $310,000, collateral $600,000, threshold 70%. Rate moves from 6.35% to 7.85% over a year, interest capitalised.
- Interest at 6.35% for a year
- about $19,685
- Interest at 7.85% for a year
- about $24,335
- Additional balance from the rate change
- about $4,650
- Trigger value at $310,000
- $442,857
- Trigger value at $334,335
- $477,621
- Change in borrowing capacity
- None
Capacity is set by collateral, not by the rate.
The trigger value rose by $34,764 and capacity rose by nothing. That gap is what the phrase 'without a matching change' describes.
Check yourself
Your rate rises from 6.35% to 7.85%. What happens to your trigger value, and what happens to your borrowing capacity?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.