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A fixed interest rate loan is a loan where the interest rate doesn't fluctuate during the fixed rate period of the loan. This allows the borrower to accurately predict their future payments. Variable rate loans, by contrast, are anchored to the prevailing discount rate.
A fixed interest rate is based on the lender's assumptions about the average discount rate over the fixed rate period. For example, when the discount rate is historically low, fixed rates are normally higher than variable rates because interest rates are more likely to rise during the fixed rate period. Conversely, when interest rates are historically high, lenders normally offer a discount to borrowers to fix their interest rate over time, as rates are more likely to fall during the fixed rate period.
Some fixed interest loans - particularly mortgages intended for the use of people with previous adverse credit - have an 'extended overhang', that is to say that once the initial fixed rate period is over, the person taking out the loan is tied into it for a further extended period at a higher interest rate before they are able to redeem it.
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