Fixed rate

Definition

A fixed rate locks the interest on a loan for its term, so the repayment never changes. It removes the risk of rising rates and makes budgeting simple — you know exactly what you will pay every month.

Why it matters

A fixed rate removes the rate-rise scenario from a stress test, which is why many directors prefer it for planning. Compare with a variable rate — see fixed vs variable.

In practice

Picture a UK limited company taking on a fixed-rate facility to fund a piece of equipment or to smooth a seasonal cash gap. From the day the facility is agreed, the finance director can drop the repayment straight into a cash flow forecast as a constant line, because it will not move with base rate decisions or wider market sentiment. That certainty is most valuable when the business is already working to tight margins, since it removes one variable from the planning exercise entirely.

The trade-off shows up if market rates fall after the facility starts: the company carries on paying the rate it locked in, even though a new borrower might now get a cheaper deal elsewhere. Directors weighing a fixed rate are, in effect, buying predictability and giving up the chance of a lower cost later — a trade worth making when stability matters more than chasing the best possible price.

How lenders read it

When a lender prices a fixed-rate facility, it is taking on the risk that its own cost of funds could rise over the term while the borrower's rate stays put. Lenders typically factor this into how the facility is structured and priced at the outset, rather than adjusting it later — which is part of why fixed-rate pricing can look different from variable pricing for what looks like a similar facility on the surface.

From the borrower's side, a fixed rate is also read as a signal of confidence in cash flow planning: it works best where income and outgoings are reasonably predictable, so the fixed repayment sits comfortably within normal trading patterns. Where cash flow is highly seasonal or uncertain, it is worth reading a fixed rate alongside the wider stress test for the facility rather than in isolation.