Unsure how to work out basis points on your own? Help is here – simply use my basis points calculator below to check how much your interest fees will likely change by in the repayment periods to come.
Enter your current mortgage or loan rates below along with your interest rates and the basis points your lender is suggesting to increase or decrease by.
If you’re looking for how to calculate basis points in Excel, then jump down to the end of the article for the simple explanation!
Basis points – Diving in further
When paying back a mortgage, or considering loans for the first time, you’ll likely pay a lot of attention to interest. As you may know, interest is a percentage of the amount you owe, either charged on top, or due back to you (depending on the scenario).
But, what about basis points? What are basis points in mortgage calculations – and should you be worried?
What is a basis point?
A basis point is one percent divided by 100. As a percentage, 1 basis point is equal to 0.01%. Basis points are useful in helping us understand how much interest, payments due, or overall product values increase or decrease by.
By using basis points, we can more clearly understand how much a number will change from one period to the next. For example, if a lender advises you that your interest rate will increase 25 basis points from 6%, that means your new rate will be 6.25%.
This method helps to reduce the risk of ambiguity in calculating repayments, interest rates, and other financial changes. In some cases, for example, you may assume interest rates increase by solid blocks of one or two percent – for the avoidance of all doubt, banks, lenders, and traders use basis points to accurately demonstrate new totals.
Basis Points vs Percentage
As outlined above, 1 percentage point = 100 basis points. If we approach it the opposite way, 1 basis point = 0.01%.
It can get confusing quickly, so I recommend using our basis points calculator above. Alternatively, you can easily set up a basis points calculator in Excel too. I’ve covered that in greater detail below.
Why are basis points so important?
It’s important to understand the math behind basis points simply because, especially in real estate, markets evolve constantly, and move extremely fast. That’s why, if you run an adjustable-rate mortgage, it’s not unheard of to find basis points mentioned in letters you receive.
Basis points are helpful for both borrowers and lenders. For borrowers, they’re great for working out how much exactly they can expect to pay from one lending period to the next. For lenders, basis points help them to make small, accurate adjustments to their rates to counteract the markets.
Remember, too, that if you don’t see “basis points” mentioned in full in your loan or mortgage documents, they may be listed as “bp” – keep your eyes peeled!
Why do we use basis points instead of percentages?
In many cases, financial institutions use both! However, basis points are highly convenient for both lenders and borrowers to calculate.
Often when interest rates change, it is by small amounts such as 0.1% or 0.25%, so it’s easier to just say 10 bps or 25 bps, instead of saying “0 point 1 percent”. I think it simply comes down to convenience, and over time, it just became a default standard in the finance industry.
Whenever you see basis points or bps mentioned in letters from your bank or lender, remember that they’re equivalent to 0.01% – and apply that to your current rate!
What are bps?
bps, is a short form of saying or writing basis points. Often pronounced as “bips”, it is more convenient to say rather than the full form of basis points.
So the next time someone tells you interest rates are going up by 0.25%, be sure to say, “Bro, you mean 25 bps?”
What are Fed basis points?
Fed basis points are those bps used by the Federal Reserve to measure and alter interest rates.
You’ll only need to worry about Fed basis points – if at all – when borrowing money within the US, as it’s here where the Federal Reserve manages finances cross-country.
How will basis points affect my mortgage?
If you’re repaying a fixed-rate mortgage or loan, you won’t need to worry. Provided your lender has made it clear how much your interest rate(s) will remain for the duration of your repayment period, and you understand the contract signed, there’s no cause for alarm.
If you owe money on a non-fixed interest mortgage or loan, however, you may find basis points change over the course of your repayment period.
For example, a bank or lender may write to you to advise that your rate is increasing by 300 basis points for the next repayment period. If you already repay your lender at a rate of 4.5%, for example, you can expect your new rate to be 7.5%.
Let me make it clear that I have no monopoly over when, how, or why lenders change basis points on repayment percentages! If you’re worried, always make sure to contact your lender directly for an explanation.
How to Calculate Basis Points in Excel
It’s pretty straight forward to convert basis points to percentage in Excel. Let’s take a screenshot of Excel below first.
Cell B2 is where we enter the value for Basis Points (or bps). To calculate what this means in percentage terms, in cell B3 (or could be any other cell), we enter the formula = B2/10000 .
If you’re wondering why we divide by 10,000, the reason is:
- First we have to convert bps to percentage, which involves the first division by 100.
- Second to represent in proper decimal format in Excel, we have to take percentage and divide by 100 again.
The net result of dividing by 100 twice is that we end up dividing by 1002 = 10,000.
For the example shown, this takes the 25 bps and would show the value 0.0025. However we want to see it in percentage terms, so the last step is to format the cell to show the result properly.
Hit the ‘%’ symbol in Number formatting and you will see the result as 0.25%, which is exactly what we want.
FAQs
How much is 50 basis points?
50 basis points is equal to 0.5%. This can be calculated by dividing 50 by 100 to get 0.5%.
How much is 100 basis points?
100 basis points is equal to 1%. This can be calculated by dividing 100 by 100 to get 1%.
Is 1000 basis points 1%?
No, 1000 basis points is equal to 10%. This can be calculated by dividing 1000 by 100 to get 10%.
What is 75 basis points equal to?
75 basis points is equal to 0.75%. This can be calculated by dividing 75 by 100 to get 0.75%.
Leave a Reply