Interest rate floor (on a loan)
What is an interest rate floor on a business loan, and why does it matter with a swap?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
An interest rate floor on a loan sets a minimum for the base rate used to calculate interest, most often zero, so that if the market rate falls below it the borrower still pays the floor plus the full margin. It protects the lender's return when rates are very low. It needs reading beside any hedge: a swap without a matching floor makes the borrower pay the negative rate under the swap while the loan's base rate stays at zero, so the all-in cost ends up above the fixed rate plus margin that the swap was meant to lock in.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// WORKED IN
// NEXT TO IT
- Commitment fee
- Break cost
- Margin ratchet
- Line fee
- Establishment fee
- Risk-adjusted return on capital (RAROC)
- Risk-based pricing
- Credit margin
- Cost of funds
- Default interest
- Prepayment fee (early repayment fee)
- Sustainability-linked margin
- Bank bill rate (BKBM / BBSY)
- All-in rate (all-in cost)
- Funds transfer pricing (FTP)
- Wallet share
- Utilisation fee
- Agency fee
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