A fixed interest rate provides certainty, while a variable rate can work out cheaper but carries risk. The right choice depends on your business, not merely on current interest rates.
When taking out a commercial loan, you almost always face a choice between a fixed and a variable interest rate, and sometimes an intermediate form with a fixed-rate period. Many business owners base this decision primarily on which rate is currently the lowest, whereas the broader question is really: what risk suits my business and how much certainty do I need in my cost structure?
This article explains the core differences between both options, shows you how to assess interest rate risk for your own situation, and provides a worked example to make the decision concrete. For current interest rates and forecasts, we refer to publications from DNB and the interest rates of your own lender.
The core difference between fixed and variable
With a fixed interest rate, you agree on a fixed percentage for the entire term or for a pre-agreed period. Your monthly payments therefore remain predictable, regardless of movements in the capital markets.
With a variable interest rate, the rate moves in line with a benchmark rate, such as Euribor, plus a margin applied by the lender. This means your interest costs can fall if the benchmark rate drops, but can also rise if it goes up, without you having any control over it.
When a fixed rate suits your business
- You operate on tight margins and have little room to absorb an increase in interest costs without impacting operations.
- You are funding a long-term investment, such as commercial premises, where you want certainty over outgoings for a substantial part of the loan term.
- You value budget predictability over the prospect of a lower interest rate in the short term.
- You have limited time or capacity to actively monitor interest rate movements and react promptly to changes.
When a variable rate is a viable option
- You have healthy profit margins and can absorb a temporary rise in interest costs without running into difficulty.
- The loan has a relatively short term, meaning the risk of major interest rate swings across the entire period is more limited.
- You expect to repay the loan ahead of schedule, for instance following an asset sale, meaning early repayment penalties on a fixed-rate loan could work against you.
- You want to be able to benefit from falling interest rates without needing to refinance in the meantime.
Worked example: the impact of an interest rate fluctuation
Suppose a business borrows 300,000 euros over ten years. At a fixed rate of 5.5 per cent, the annual interest costs in year one are approximately 16,500 euros, tapering off as repayments are made. At a variable rate starting at 4.8 per cent, the costs in year one are lower, at around 14,400 euros.
If the variable rate rises to 6.5 per cent in year three, the interest costs climb above the level of the fixed-rate loan. This example uses illustrative rates to demonstrate the mechanism; actual rates at the time of closing are agreed with your lender and can be compared using the finance calculator.
Hybrid options: a fixed-rate period
Many lenders offer an intermediate option where the interest rate is fixed for part of the term—for example, for three or five years—and is subsequently reset or switches to variable. This provides temporary certainty without locking you into a fixed rate for the entire lifespan of the loan.
This option can be suitable if you expect your business circumstances or market conditions to change within a few years—for example, due to planned growth or an anticipated capital repayment from another source—and you therefore do not wish to commit for the full term.
How the market influences the interest rate climate
Interest rates on commercial loans track the broader capital markets and monetary policy, on which De Nederlandsche Bank and the European Central Bank publish regular updates. These figures indicate the general direction in which rates are heading, but offer no certainty regarding the future.
Use these publications as contextual background when weighing your decision, not as a forecast on which to stake a definitive choice. The decision between fixed and variable should primarily align with the risk your business can absorb, rather than a speculative bet on the direction of interest rates.
Next steps
- Determine how much leeway your budget has to absorb an increase in interest expenses without harming business operations.
- Review the loan term and consider whether you anticipate early repayment or refinancing.
- Request both fixed and variable rate quotes from your lender, including the terms for early redemption.
- Consult publications from DNB for broader interest rate trends to inform your decision.
- Use the finance calculator to compare the impact of different interest rate scenarios on your monthly commitments.
Frequently asked questions
- Is a fixed rate always safer than a variable rate?
- A fixed rate provides greater certainty regarding your costs, but that does not automatically make it the best choice. If your business can comfortably absorb interest rate fluctuations and the loan has a short term, a variable rate may ultimately work out cheaper.
- Can I switch from a variable to a fixed rate during the term?
- With many lenders this is possible, although conditions and fees may apply. Check this with the lender before taking out the loan, so that you know what flexibility you have.
- Where can I find reliable information on interest rate expectations?
- Publications from De Nederlandsche Bank and the European Central Bank provide insight into monetary policy and broader interest rate trends. These are indicators, not guarantees of future rates.