Fixed Rate

With a fixed-rate loan, the interest rate is locked in when the loan starts. If it is fixed for the whole loan, the monthly payment stays the same from the first payment to the last. Some products, such as many mortgages, are fixed only for an initial period of, say, two, five or ten years, after which the rate may change.

The main benefit is certainty. A borrower with a fixed-rate mortgage of 1,200 a month knows exactly what they will pay, even if central bank rates rise sharply. This makes budgeting easier and protects against rising rates.

The trade-off is that fixed rates are often slightly higher than variable rates when the loan begins, because the lender is taking on the risk that rates will rise. If market rates fall, a fixed-rate borrower keeps paying the higher rate unless they refinance, which may involve fees or penalties for ending the deal early.

Fixed rates also apply to savings. A fixed-rate deposit pays the same rate for its term, which protects savers if rates fall but means missing out if rates rise.