Fixed or floating rate — what is the difference?
A fixed rate locks the rate for a period; a floating rate can change. Here are the mechanisms and what to understand in the contract — without recommendations.
Choosing between a fixed and a floating rate is about how rate changes are shared between you and the lender over time. A floating rate can move with the market and the lender’s terms. A fixed rate locks the rate for an agreed period so the instalment is more predictable in that period — within what the contract specifies.
Floating rate
With a floating rate, the interest portion changes when the rate level changes. On an annuity loan the instalment is typically recalculated. The upside is that you can follow the rate down when the market falls. The downside is that the budget must tolerate rises. Stress tests at +1% and +2% are one way to visualise that uncertainty.
Fixed rate
A fixed rate provides stability for the agreed period. You trade market risk for predictability. The fixed rate often sits at a different level from today’s floating rate, and breaking the fix early can involve break costs. It is therefore important to read what happens if you sell, refinance or redeem early.
What the contract should make clear
Either way: note the fixation period, what happens on rate changes, fees, room for extra payments, and the cost of early redemption. Two offers with “roughly the same rate” can differ sharply on flexibility. Effective rate and total cost help on price; contract terms explain flexibility.
Combinations
Some loans split into a fixed and a floating part. You then get a mix of predictability and market exposure. Mathematically you can stress-test the floating part separately and treat the fixed part as given for the period. That is more nuanced than talking about “the whole loan” as one rate.
Market expectations are not the same as a contract
Opinions about where rates “should” go are common. For your agreement, what is written — and what actually happens to a floating rate over time — is what counts. A calculator can show consequences of different rates; it cannot predict the rate you will have in two years.
With a fixed rate it is especially important to understand break terms. The cost of leaving early can make “predictability” expensive if plans change. With a floating rate it is equally important to understand how quickly a rise can hit the instalment.
Some people compare a fixed rate directly with today’s floating rate. That can mislead if periods and fees differ. Prefer comparing cash flows over the same horizon, or be explicit that you are comparing different risk profiles.
Either way: document your assumptions. Later you can see whether the outcome came from rate moves, fees or something else — without rewriting the story after the fact.
Summary
Floating rates follow the market; fixed rates lock for a period with their own break terms. Neither is universally best. Understand cash flow, fees and fixation before you compare. Calculators can illustrate instalments at different rates, but they do not replace reading the contract and are not advice to fix or not to fix.
This article is meant as neutral background knowledge. Figures you see in calculators on this site are informational estimates, not loan offers or advice about what you should do. Actual terms are set in an agreement between you and the lender, and may differ from simplified models.