The fixed interest period is a temporarily limited period during the loan agreement in which the interest on the loan is fixed. If the interest is fixed over the entire term, then one speaks of a fixed interest loan.
Loan with fixed interest
Fixed interest rates of five, ten, fifteen or even twenty years are common. The following applies: the longer the interest is fixed, the higher the interest rate. After the fixed interest period has expired, the borrower has two options: the loan is rescheduled, i.e. there is a change of bank, which usually involves high transfer fees, or the bank submits a new loan agreement to the borrower, which revises the terms of the old financing plan and repeats repeatedly. Within this fixed interest period, a special repayment, i.e. a payment that goes beyond the contractual agreements, is not possible without the borrower being entitled to early repayment penalty. This does not apply to consumer loans, special repayments are possible at any time.
However, some lenders now also allow the borrower to make special repayments during a fixed interest period, which applies to both the installment loan and the real estate loan. In the case of mortgage loans, however, these possible special repayments are usually limited in amount, for example to 10,000 USD per year. In general, the borrower has to consider some things anyway if he can choose between a certain fixed-rate period and a variable interest rate at the beginning of the borrowing process.
Disadvantage of an agreed rate
The disadvantage of an agreed rate fixation period comes into play especially when the loan interest generally falls after the loan has been taken out. Because then the borrower is of course still bound to the agreed interest rate for the agreed period, for mortgage loans this is usually five or ten, sometimes even up to 20 years. In this respect, it is only advisable to agree a fixed interest period from the borrower’s point of view if it is more likely that future interest rates will rise.