Pricing
SONIA
SONIA is the sterling reference rate almost every floating UK business loan is priced over. Your margin is fixed at signing; SONIA is not, and it moves your interest bill without anyone renegotiating anything.
Also called reference rate · compounded SONIA · sterling overnight index average · base rate loan · interest rate hedging · interest rate swap · interest rate cap · does my loan require hedging
A one-point move in SONIA is £50k a year on £5m. Nobody renegotiates anything; the bill simply changes.
| Facility drawn | Extra cost per year |
|---|---|
| £5m | £50k |
| £10m | £100k |
| £15m | £150k |
Illustrative sensitivity on fully drawn facilities. Derived arithmetic: 1% of the drawn balance.
What SONIA is
SONIA, the Sterling Overnight Index Average, is a measure of what banks paid to borrow sterling overnight from other financial institutions on the previous business day. It is published by the Bank of England each morning and is based on real transactions rather than on estimates.
It is the reference rate almost every floating-rate sterling business loan is priced over. Your facility quotes a margin over SONIA, so your interest cost is the sum of two things: a margin fixed at signing, and a reference rate that moves.
At 2 July 2026, SONIA sat at 3.73%. On a facility with a 3% margin, that gives a bank all-in cost near 6.75%.
SONIA against Bank Rate
Bank Rate is the policy rate set by the Monetary Policy Committee. SONIA is a market rate reflecting actual overnight borrowing. They track each other closely but are not the same number and are not set by the same mechanism.
At the time of writing Bank Rate stood at 3.75%, held at the June 2026 meeting, with SONIA at 3.73%. The small gap is normal; SONIA typically sits marginally below Bank Rate.
The practical distinction for a borrower is about anticipation. Bank Rate changes on announced meeting dates and moves in steps. SONIA moves daily and, because it reflects market conditions, will often have partly absorbed an expected policy change before the announcement. If your facility is priced over SONIA, watching Bank Rate alone tells you the direction but not the timing.
Lenders rarely require the whole loan to be hedged. Half to three quarters of the term debt is the usual ask.
| Position | Share hedged |
|---|---|
| Unhedged | Uncommon if leveraged |
| The usual requirement | 50% to 75% |
| Fully hedged | Unusual |
Convention: 50-75% of term debt hedged, typically for two to three years.
Compounded in arrears, and what that means in practice
SONIA is an overnight rate, so a facility with a quarterly interest period cannot simply use a single published figure the way a forward-looking term rate once did. Instead the daily rates across the interest period are compounded, and the resulting figure is applied at the end.
The consequence is that you do not know the exact interest cost for a period until close to its end. Facility agreements handle this with an observation lag, commonly a few business days, so the final days of the period use rates from slightly earlier and the amount can be calculated and invoiced in time.
For most borrowers this is administrative rather than commercial. It matters in two situations: cash forecasting, because the precise figure firms up late in the quarter, and prepayment, because repaying mid-period requires the accrued compounded amount to be calculated to that date.
What a rate move costs
The arithmetic is simple and worth having in mind, because the amounts are not small.
A one percentage point rise in SONIA adds 1% of the drawn balance to the annual interest bill. On £5m fully drawn that is £50,000 a year. On £10m it is £100,000. At the top of the £3-15m band it is £150,000.
Nothing about the business or the facility has changed. The margin is untouched, no covenant has moved, and nobody has renegotiated anything. That is the defining feature of floating-rate debt: a material change in cost arrives without any decision being taken.
Set that against a margin negotiation. A borrower who wins 25 basis points on a £10m facility has saved £25,000 a year. A one-point rate move is four times that, in either direction, and arrives without warning.
Where it interacts with your covenants
Rate moves feed straight into the cover tests, and this is the connection borrowers most often miss until it bites.
Interest cover measures earnings against interest, so a rise in SONIA reduces the ratio without any change in trading. Debt service cover is worse affected, because it measures cash against interest plus scheduled repayment, and interest is the part that just increased.
Leverage is untouched, since it measures debt against earnings rather than the cost of that debt. So in a rising rate environment a business can hold its leverage covenant comfortably while its cover tests deteriorate, which is precisely the pattern that has moved the binding constraint for many borrowers from leverage to cover.
The practical step is to model the covenant suite at a rate one or two points above the current level before signing, not at the rate on the day. A structure that only passes its cover test at today's SONIA is a structure with no rate headroom.
Three ways to handle the exposure. Each trades certainty against cost, and against the upside if rates fall.
| Approach | Trade-off |
|---|---|
| Floating, unhedged | No cost, full exposure |
| Cap | Premium, keeps upside |
| Swap | Fixed, break costs |
Relative position of each instrument. Illustrative, not measured data.
Hedging: how much, and for how long
Lenders on leveraged facilities commonly require part of the term debt to be hedged, typically between half and three quarters of it, for two to three years.
The proportion is a deliberate compromise. Hedging everything removes the risk and also removes the benefit if rates fall, and it makes any prepayment more complicated. Hedging nothing leaves a leveraged borrower fully exposed on the largest cost line in the business. Half to three quarters leaves some participation in a fall while capping the damage from a rise.
The tenor is usually shorter than the facility, which is a point worth noticing. A five-year facility with a three-year hedge is unhedged for its final two years, exactly the period in which a refinancing is being arranged. Whether that matters depends on the rate view, but it should be a decision rather than an oversight.
Swap or cap
Two instruments, and the choice is about what you are buying.
A swap exchanges the floating rate for a fixed one. It gives complete certainty on the hedged portion, costs nothing upfront, and carries a real risk on the other side: if the loan is repaid early, the swap has to be broken, and where rates have fallen since it was struck the break cost can be substantial.
A cap sets a ceiling. You pay a premium at the outset, you are protected above the strike, and you keep the benefit if rates fall. There is no break cost, because a cap that is no longer needed simply expires or can be sold.
For a business that might refinance or sell within the facility term, the cap's lack of break cost frequently justifies the premium. For a business certain to hold the debt to maturity, the swap is usually the cheaper certainty.
The over-hedging trap
The most common hedging problem at this size is a hedge that outlives the debt it was protecting.
A facility that amortises, or that is subject to a cash sweep, has a declining balance. A hedge struck on the opening amount and left in place becomes progressively larger relative to the loan, until the business is hedging debt it no longer has. If rates then fall, it is paying a fixed rate on a notional that exceeds its actual borrowing.
The answer is an amortising hedge notional that steps down with the facility, matched to the scheduled profile. It is a small drafting point at the outset and an expensive one to fix later, and it is worth raising alongside the amortisation schedule rather than treating hedging as a separate conversation after completion.
Common questions
What is SONIA?
The Sterling Overnight Index Average, a Bank of England measure of what banks paid to borrow sterling overnight on the previous business day. It is based on real transactions and is the reference rate almost every floating-rate sterling business loan is priced over.
What is the difference between SONIA and Bank Rate?
Bank Rate is the policy rate set by the Monetary Policy Committee and changes on announced dates. SONIA is a market rate reflecting actual overnight borrowing and moves daily. They track closely, with SONIA typically marginally below: at the time of writing SONIA was 3.73% against Bank Rate at 3.75%.
What does a rate rise cost me?
One percentage point on the drawn balance. On £5m fully drawn that is £50,000 a year, on £10m £100,000, on £15m £150,000. Nothing about the business or the facility changes: the margin is untouched and nobody renegotiates anything, which is the defining feature of floating-rate debt.
What does compounded in arrears mean?
SONIA is an overnight rate, so a quarterly interest period compounds the daily rates across the period and applies the result at the end. Facility agreements use an observation lag of a few business days so the amount can be calculated in time. It matters mainly for cash forecasting and for calculating accrued interest on a mid-period prepayment.
How does a rate rise affect my covenants?
It hits the cover tests without touching leverage. Interest cover falls because interest has risen while earnings have not; debt service cover falls further because it counts interest plus repayment against cash. Leverage is unaffected, so a business can hold its leverage covenant comfortably while its cover tests deteriorate.
How much of my loan will I have to hedge?
On a leveraged facility, commonly between half and three quarters of the term debt, typically for two to three years. That leaves part of the exposure floating so you keep some benefit if rates fall, while capping the damage from a rise. Note the hedge tenor is often shorter than the facility.
Should I use a swap or a cap?
A swap fixes the rate with no upfront cost but carries break costs if the loan is repaid early, which can be substantial where rates have fallen. A cap costs a premium, protects above a strike, keeps the benefit of falls and has no break cost. If you might refinance or sell within the term, the cap's lack of break cost often justifies its premium.
What is over-hedging?
Holding a hedge larger than the debt it protects. A facility that amortises or is subject to a cash sweep has a declining balance, so a hedge struck on the opening amount grows relative to the loan until you are hedging debt you no longer have. The fix is an amortising hedge notional stepping down with the facility, agreed alongside the repayment schedule.
The full treatment sits in the guide: all in cost of debt.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.