In short: a variable (floating) interest rate is a rate that changes with a set interest index (reference rate), so the instalment on the loan can go up or down.
Simply put: the rate is usually "index + margin". When the index rises, so does the instalment. At the start it is often lower than a fixed rate, but the risk of a rise is yours. So your budget must cope with a higher rate too.
Example: a €100,000 mortgage over 25 years. At 4 % the instalment is €527.84; if the rate rises to 6 % — €644.30, that is €116.46 more every month.
Watch out: do not borrow the largest amount the bank approves, but the amount your budget can bear at a higher rate.
The EU rule: the credit agreement must state the borrowing rate, any index or reference rate and the conditions for changing it (Directive 2008/48/EC, Article 10). No compensation is due for early repayment during a variable-rate period (Article 16).
Example: Bulgaria — under the law on consumer credit for immovable property (Article 25), for a housing loan the method for the reference rate is part of the contract and may not be changed unilaterally.
Check in your country — Which index is your loan linked to, and how often is the rate reset? Ask the lender and read the contract.
Source: Directive 2008/48/EC — https://eur-lex.europa.eu/eli/dir/2008/48/oj; Pecuvo Module 22, Chapter 5; law on consumer credit for immovable property (in Bulgarian) — https://lex.bg/bg/laws/ldoc/2136890030