Side by side
| Criterion | Fixed rate loan | Variable rate loan |
|---|
| Repayment certainty | Fixed for the term, unaffected by market moves | Can rise or fall with reference rate changes |
| Starting rate | Often slightly higher than variable at outset | Often lower at outset |
| Early repayment | May carry a break cost | Typically fewer restrictions |
| Budgeting | Straightforward, same payment each period | Requires monitoring and contingency for increases |
| Best suited to | Businesses wanting predictable costs | Businesses expecting rates to fall or wanting flexibility |
| Risk exposure | None to rate rises during the term | Full exposure to rate rises during the term |
Certainty versus flexibility
A fixed rate gives complete certainty over what a loan will cost for its entire term, which makes budgeting straightforward and protects against rate rises during that period. This certainty typically comes at a small premium compared with the starting rate on a variable loan, since the lender is also taking on the risk of future rate movements.
A variable rate often starts lower and gives more flexibility, including generally fewer restrictions around early repayment, but leaves the business exposed to rising costs if the reference rate increases during the term.
What should influence the decision
The choice partly depends on your view of where interest rates are heading, but should also reflect how much your business can absorb if repayments increase. A business operating on tight margins with little room to accommodate higher repayments is usually better served by the certainty of a fixed rate, even at a small premium.
Break costs and flexibility
Fixed rate loans commonly carry an early repayment or break charge, since the lender has typically hedged the fixed rate itself, so businesses expecting to repay early or refinance soon should weigh this carefully. Variable rate loans are generally more forgiving of early repayment, which matters if your plans could change during the term.
The short answer
Choose a fixed rate for certainty and protection against rising rates, and a variable rate where flexibility, a lower starting cost, or an expectation of falling rates matters more.
Questions
Can I switch from a variable rate to a fixed rate part way through a loan?
Some lenders allow this, though it may involve renegotiating terms or a fee, so it is worth checking at the outset whether the option exists.
Is a fixed rate always more expensive overall?
Not necessarily, since if reference rates rise significantly during the term, a fixed rate loan can end up cheaper than an equivalent variable rate facility.
What reference rate do variable business loans typically track?
This varies by lender and jurisdiction, but commonly tracks a central bank base rate or an interbank lending rate plus an agreed margin.
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