Fixed Interest Rate

DEFINITION of 'Fixed Interest Rate'

An interest rate on a liability, such as a loan or mortgage, that remains fixed either for the entire term of the loan or for part of this term. A fixed interest rate may be attractive to a borrower who feels that the interest rate might rise over the term of the loan, which would increase his or her interest expense. A fixed interest rate, therefore, avoids the interest rate risk that comes with a floating or variable interest rate, wherein the interest rate payable on a debt obligation depends on a benchmark interest rate or index.

BREAKING DOWN 'Fixed Interest Rate'

While a home buyer in the United States can obtain a mortgage with a fixed interest rate for the full 30-year term of his or her mortgage, in Canada, a home buyer can only "lock in" or obtain a fixed interest rate for a maximum of five to seven years of a 25-year mortgage.

Borrowers are more likely to opt for fixed interest rates during periods of low interest rates, since the opportunity cost, if interest rates go lower, is still much less than during periods of high interest rates.

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