With a fixed interest rate, the loan interest rate is set in the contract and remains unchanged for a specified period, so the monthly payment remains constant regardless of market conditions. With a variable interest rate, the rate is comprised of a bank margin and a base index (most commonly, WIBOR in Poland), which changes over time, increasing or decreasing the monthly payment accordingly. Fixed interest rates provide predictability, while variable rates allow you to benefit from lower interest rates but carry the risk of higher rates.
The choice is most important when it comes to mortgages with repayment terms of several decades or even decades. Below, we explain how both interest rate types work and when it makes sense to use each.
To sum it up
- Fixed rate: The interest rate is set in the contract for a certain period, the payment amount does not change - the risk of an increase in the interest rate is borne by the bank.
- Variables: margin (fixed) + base interest rate (variable), payment amount changes every few months – the risk is borne by the borrower.
- In Polish mortgages A fixed interest rate is usually "fixed periodically" for a period of several years, after which new terms are established.
- What to choose: A fixed rate if your budget doesn't allow for higher monthly payments; a variable rate if you have financial reserves and are willing to take risks.
What is a fixed interest rate?
At fixed interest rate The bank and the client agree on a single interest rate for a specified period. During this period, the monthly payment (if equal payments are made) remains unchanged, even if the central bank raises or lowers interest rates.
In Poland, mortgage loans most often include periodically fixed interest rates The rate is guaranteed for several years (usually 5 or 7 years in bank offers), after which the bank offers a new fixed rate for the next period, or the loan switches to a variable rate—in accordance with the terms of the agreement. Loans with a fixed rate for the entire term, for example, 25 years, are practically unavailable.
Predictability usually comes at a price: the bank assesses the risk of future interest rate changes, so the fixed rate at the time of signing the contract is often higher than the current variable rate. However, this isn't a rule—it depends on market expectations regarding future interest rates.
What is a variable interest rate?
Variable interest rate is the sum of two elements:
- Bank margin – is stipulated in the agreement and, as a rule, remains unchanged throughout the entire loan term.
- Base rate – a market rate that fluctuates depending on the situation on the money market and the decisions of the central bank. In Poland, this is most often WIBOR 3M or WIBOR 6M; a base rate reform is currently underway, as part of which WIBOR will be replaced by a new index.
The bank adjusts the interest rate on the dates specified in the agreement—typically every three months for the 3M WIBOR and every six months for the 6M WIBOR. When the rate increases, the monthly payment increases; when it decreases, it decreases. With a long-term mortgage, even a change in the rate by a few percentage points can mean a significantly higher or lower monthly payment.
Comparison of fixed and variable interest rates
| Characteristic | fixed interest rate | Variable interest rate |
|---|---|---|
| What does it consist of? | The contract stipulates one rate. | Bank margin + base rate (e.g. WIBOR) |
| Payment amount | No change during the billing period. | It changes every time the indicator is updated. |
| Who is at risk from rising interest rates? | Bank (during the fixed rate period) | Borrower |
| Take advantage of lower interest rates. | No – the payment amount is not reduced. | Yes, the monthly payment amount is reduced. |
| Validity period | In the case of a mortgage, the term is usually several years (with a periodically fixed rate). | The entire loan term |
| Budget planning | Easy | A more challenging task is the need for financial reserves. |
| Leg at the beginning | Often higher than the variable rate (depending on the market). | Depends on the current indicator level. |
Fixed or variable interest rate – which one to choose?
There is no universal answer, as no one knows future interest rates. However, it is useful to take an honest assessment, What level of risk can your budget withstand? .
Fixed interest rates should be considered in the following cases:
- This payment represents a significant portion of income, and increasing it would be a serious problem.
- You have some savings for a rainy day.
- You want peace of mind and easy planning of your expenses for the coming years.
Variable interest rate may be justified in the following cases:
- You have a clear budget and a savings reserve.
- You plan to quickly overpay or pay off the loan.
- You agree that the monthly payment amount may increase in exchange for the opportunity to decrease it.
Before making a decision, compare offers not only by interest rates, but also by annual percentage rate (APR) , fees, mandatory insurance, and early repayment terms. Carefully review the terms of the agreement to determine what happens after the fixed-rate period ends and whether the interest rate can be adjusted during the loan term. If in doubt, consult an independent mortgage advisor—this information is for informational purposes only and does not constitute financial advice.
What happens after the fixed rate period ends?
With periodically fixed interest rates, the bank offers a new rate for the next period until the loan expires. The new rate depends on current market conditions and may be higher or lower than the previous rate. If the client rejects the new rate, the loan typically switches to a variable rate—the exact procedure is described in the agreement. Thus, a fixed interest rate protects against rate changes only for a certain period, not for the entire repayment term.
Frequently Asked Questions (FAQ)
What is the difference between fixed and variable loan interest rates?
With a fixed rate, the rate is set in the contract for a specific period, and the payment amount does not change. With a variable rate, the rate is equal to the bank's margin plus the base rate (e.g., WIBOR), so the payment amount increases or decreases depending on changes in this rate.
Does the fixed interest rate remain the same throughout the life of the mortgage?
Generally, no. In Poland, banks generally offer periodic fixed interest rates for several years. After this period, the bank offers a new fixed rate, or the loan switches to a variable rate as agreed upon.
Can I change the variable interest rate to a fixed rate during the loan term?
Many banks offer this option, usually through contract amendments. The terms (interest rate, possible fees) vary by bank and the current market situation, so you should check with your bank.
What is the margin on a variable rate loan?
The margin is a fixed portion of the interest rate set by the bank in the contract. It is supplemented by a variable base rate. The lower the margin, the cheaper the loan for the same base rate.
Which interest rate is cheaper?
It's impossible to predict in advance. Adjustable-rate loans are cheaper when interest rates are falling or low, while fixed-rate loans are cheaper when rates rise. The final cost is determined by future interest rates, which no one knows, so it's worth comparing annual interest rates and budgeting for some savings.
See also
- What is the difference between WIBOR 3M and WIBOR 6M?
- What is the difference between stocks and bonds?
- What is the difference between a percentage point and a percent?
- What is the difference between leasing and long-term car rental?