Interest rate fixation

What it means

Fixation is the period during which the bank cannot unilaterally change the agreed interest rate on a loan. It changes neither the maturity nor the principal, only how long the instalment stays predictable.

The opposite is a floating rate tied to EURIBOR plus the bank margin, which moves with the market. Fixation is insurance against rising rates, and the borrower normally buys it with a higher starting rate.

The statutory rules on free repayment at the end of a fixation protect consumers with housing loans. A business loan to an s. r. o. or a sole trader gets no such rules, and everything, including whether and at what cost the company may repay when the fixation ends, is set by the loan agreement alone. The same word in two contracts carries different rights.

How it works in practice

Before the fixation ends the bank announces the new rate. That is the open window for refinancing with another bank or for an extra repayment without a fee, and on housing loans the law also lets part of the principal be repaid each year free of charge.

With an annuity instalment the rest of the schedule is recalculated once the fixation changes: the split between principal and interest moves, not the final date. The full cost including fees is shown by the APR, not by the rate itself.

When the instalment changes after a fixation ends, we also update the split of each instalment into principal and interest in the books. Interest on a business loan is an expense and tax-deductible, while principal only reduces the liability. That is why we need the bank’s new repayment schedule straight away, not at year end when the loan balance fails to match the statement.

What to watch out for

The end of a fixation is easy to sleep through. Do nothing and the loan rolls onto the rate in the bank letter while the free window for early repayment closes: what follows is either a dearer instalment for years or an early repayment fee capped by law.

A long fixation makes early repayment outside the free window expensive. A company that sells the financed property or wants to move to a cheaper bank pays compensation for the bank’s costs, and on a business loan the contract may set it with no statutory cap. The length of the fixation should match how long the company really plans to hold the asset.