The headline rate on a margin facility tells you less than you would expect. Two lenders quoting the same annual percentage can produce materially different charges, because the cost of a facility is determined by four things: the day-count convention, how tiers are applied, when interest is settled, and what else is added on top.

This article works through the arithmetic in full so you can check any statement you receive.

The core formula

Interest accrues on the balance outstanding at the end of each day:

Daily interest = Balance × (Benchmark + Spread) ÷ Day-count basis

Three inputs, one convention. Each deserves attention.

The balance

Only the drawn amount accrues interest — the mechanics are set out in our margin financing overview. A facility limit of £1,000,000 with £120,000 drawn accrues on £120,000. If you repay mid-month, accrual stops that day — which is why short-dated borrowing is genuinely cheap and why paying down an unused balance is always worthwhile.

The rate

An institutional facility is priced as a floating benchmark plus a fixed spread:

Currency Benchmark Published by
GBP SONIA Bank of England
USD SOFR Federal Reserve Bank of New York
EUR EURIBOR European Money Markets Institute

The benchmark moves with the market. The spread is contractual and typically tiers downward as the balance grows — a larger balance attracts a tighter spread, and the tighter spread usually applies to the whole balance rather than only the incremental slice. Check which convention your lender uses, because on a large facility the difference is significant.

The day-count basis

Most wholesale money-market lending uses a 360-day basis rather than 365. This is not a rounding detail. A 6.00% annual rate on a 360-day basis produces a daily factor of 0.016667% rather than 0.016438% — roughly 1.4% more interest across a full year than the headline suggests.

A worked example

Take a sterling facility (you can reproduce every figure below in the cost calculator):

  • Balance: £250,000
  • SONIA: 4.20%
  • Tier spread at this balance: +1.75%
  • All-in rate: 5.95%
  • Basis: 360 days
Daily interest = 250,000 × 0.0595 ÷ 360 = £41.32

Over a 30-day month that is £1,239.58. Over a full year, £15,081.60 — which is 6.03% of the balance, not 5.95%, because of the 360-day basis.

Partial months and changing balances

Real accounts do not hold a flat balance. Interest is computed per day on that day’s closing balance, then summed:

Days Balance Rate Daily Subtotal
1–10 £250,000 5.95% £41.32 £413.20
11–20 £400,000 5.45% £60.56 £605.60
21–30 £150,000 5.95% £24.79 £247.90
Total £1,266.70

Note the middle band: the larger balance crossed into a better tier, so the rate fell even as the borrowing rose. This is exactly why tier structures matter for anyone whose balance fluctuates.

What should not appear on the statement

A transparent facility charges interest and nothing else. Be alert to:

  • Arrangement or facility fees charged for opening the line
  • Non-utilisation fees on the undrawn portion
  • Minimum monthly charges irrespective of use
  • Rate floors that prevent you benefiting when the benchmark falls
  • Currency conversion spreads applied when the loan currency differs from the position currency

None of these are inherently improper, but each changes the effective cost, and each should be disclosed before you sign, which is why our rate card lists them explicitly rather than discovered afterwards.

Checking a statement in four steps

  1. Confirm the benchmark used and the date it was fixed.
  2. Confirm the spread applied and whether the correct tier was used.
  3. Recompute one day’s interest by hand using the formula above.
  4. Multiply by the number of days at that balance and compare with the charge.

If your figure and theirs disagree by more than rounding, the discrepancy is almost always the day-count basis or the tier boundary.

The practical takeaway

Ask any prospective lender four questions: which benchmark, what spread at my expected balance, 360 or 365, and what else is charged. Four answers give you the true cost. A headline rate on its own gives you very little.

This article is general information and not investment advice. Rates and examples are illustrative.