Glossary
Fixed and variable rates
Whether your rate is locked for a period or moves with the market, and what each choice costs you when you want out.
In plain English
A variable rate moves as the lender's cost of funds and pricing move. A fixed rate is locked for an agreed period, after which the facility usually reverts to variable. Commercial facilities are often split, with part fixed and part variable, so some of the position is certain and some stays flexible.
The real difference shows up when something changes. A variable facility can usually be repaid early with little more than an administrative charge. A fixed one carries break costs, which are not a penalty but the lender's actual loss on the funding it arranged to match your fixed term, and on a large facility that number can be substantial.
Why a lender cares
Fixing does not make a facility cheaper or safer by itself, it makes the repayment predictable, which is a different thing. What a credit team looks at is whether the business can carry the position if rates move against it, which is why serviceability is tested at an assessment rate well above whatever is on offer either way.
Where this term takes you
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