Fixed Interest Rate
Fixed rate loans are those where the interest rate is fixed for a specific period of time. This means the repayments are also fixed at a determined amount for the same time frame. There are a number of time periods over which a rate can be fixed: 1, 2, 3, 4, 5 years or even up to 15 years with some lenders. Once the fixed term period ends the loan will automatically return to a variable rate or the borrower has the option of fixing the rate for another period of time.
Fixed rates reduce the borrowers risk against rates rising (known as hedging). Fixed loans buy the client security. They allow you to know their repayments for that period of time. You may be balancing their budget tightly and may want to secure their repayments and not have to worry about the risk of a rise in interest rates. In this situation it may make sense to fix for a time period. If interest rates rise then the you will be paying less interest and their monthly repayment will be less than if they had a variable loan. The downside is that if rates fall below their fixed rate they will be paying more than they could have been paying. They are very costly to get out of, with penalties for changing to a variable rate or changing lender during the fixed term (called break costs). Fixed loans are much less flexible than variable loans and sometimes charge a penalty for additional payments or limit the amount of additional payments that can be made during the fixed period.