A fixed rate loan gives protection against rising interest rates and it is one of the debt hedging mechanisms that KBC Bank Ireland offers through our Corporate Treasury division.
A fixed rate loan has a fixed interest rate for the entire term of the loan or part thereof. The distinguishing factor of a fixed-rate is that the interest rate of the contract is known at the time the loan is drawn down.
This type of loan is ideal for those clients that want certainty of cash flow and protection against higher rates. The downside is that by locking in to a fixed rate, the client cannot avail of more favourable rates if the market should fall.
So, for example, the benefit of a fixed-rate is that you will not have to contend with varying loan payments that fluctuate with interest rate movements.
When it comes to choosing the type of interest flows (variable or fixed), a trade-off exists between certainty of interest rate flows at a higher rate versus a lower initial variable cost of funds rate (in an environment where variable interest rates are expected to rise). The reward for fixing is not only certainty but the variable rate could rise significantly during the life of the fixed rate and produce large interest costs. The costs incurred with a variable rate facility can end up greater than that paid by the client with the fixed rate. Borrowers need to understand and measure risks when deciding between a variable rate loan and fixed-rate loan. Our debt hedging team can advise on the best strategies for you to pursue, depending upon individual circumstances.
Our experts in the Corporate Treasury division will be very happy to discuss this product with you in more detail if it is something that you believe may be advantageous for your business.