## What Is a Fully Indexed Interest Rate?

A fully indexed interest rate is a variable interest rate that is calculated by adding a margin to a specified index interest rate, such as LIBOR or the Fed Funds rate. Fully indexed interest rates can vary broadly based on the assigned margin above that baseline rate or what maturity term the underlying index is set at.

### Key Takeaways

• A fully index rate is a variable interest rate that is set at a fixed margin above some reference interest rate.
• Financial products that bear a fully indexed rate include adjustable rate mortgages, which can be quoted as a certain number of basis points (or percentage points) above the reference rate.
• The reference rate used can be either the prime rate, LIBOR, EURIBOR, the Fed Funds rate, or the rate on U.S. Treasury bills, or something similar.

## Fully Indexed Interest Rate Explained

Generally, a standard indexed rate is often the lowest rate a bank will charge to its highest credit quality borrowers. It is also often the rate banks charge for lending to other banks. Popular indexes for indexed rates include the prime rate, LIBOR, and various U.S. Treasury bill and note rates.

Fully indexed interest rates are used for variable-rate credit products. The margin on a fully indexed interest rate product is determined by the underwriter and based on the borrower’s credit quality. Adjustable-rate mortgages (ARMs) are one of the most common fully indexed interest rate products.

Indexed rates form the basis for fully indexed interest rate products. They can also be used as the primary rate for a variable rate interest product.

## Margin

Lenders typically assign a margin to most variable rate products, and the margin is added to a specified index rate to serve as the fully indexed interest rate charged to borrowers on credit balances. In a variable fully indexed interest rate product, the margin will typically remain the same throughout the life of the loan with the interest rate adjusted based on changes to the standard indexed rate.

Margin is determined in the underwriting process. Higher credit quality borrowers can generally expect to be assigned a smaller margin while lower credit quality borrowers will pay a higher margin.

For example, if the fully indexed interest rate on a personal loan is tied to the six-month LIBOR index with a margin of 3% then the rate would be 10% if the six-month LIBOR index were at 7%. If the six-month LIBOR index were to increase to 8%, then the new fully indexed interest rate would be 11%.