Quick reference
How fixed rates work
A fixed interest rate is agreed at the point of borrowing and does not change for the fixed period, regardless of what happens to market interest rates. If you fix your mortgage at 3,5% for 10 years, your interest rate and monthly payment remain exactly the same whether the Euribor rises to 5% or falls to 1% during those 10 years.
At the end of the fixed period, the loan typically reverts to a variable rate or the borrower must arrange a new fixed rate deal. The reversion rate may be substantially higher than the original fixed rate, so planning for this point is important.
Lenders price fixed rates at a premium above the current variable rate to compensate for the interest rate risk they absorb. When you fix, you are buying certainty. The lender is taking on the risk that rates may rise significantly above your fixed rate, in which case they receive less than the market rate. This risk has a price, which is the premium embedded in the fixed rate.
How variable rates work
A variable rate consists of two components: a reference rate (such as the 3-month or 12-month Euribor) plus a fixed margin. The margin is set by the lender based on the borrower's credit risk and does not change. The reference rate is reset periodically — monthly, quarterly, or annually — and the total interest rate adjusts accordingly.
Example: a variable rate of Euribor + 1,5%. If the 12-month Euribor is 3%, the total rate is 4,5%. If Euribor rises to 4%, the total rate becomes 5,5%. If Euribor falls to 1%, the total rate becomes 2,5%.
Variable rate borrowers benefit when rates fall. They pay more when rates rise. The key risk is that rate increases can be rapid and large — the Euribor rose from approximately -0,5% in early 2022 to approximately +4% by late 2023, a change of 4,5 percentage points in under two years. On a 200.000 variable rate mortgage, that rise increased the monthly interest charge by approximately 750 per month.
The Euribor and reference rates
Euribor (Euro Interbank Offered Rate) is the primary reference rate for variable rate loans in the Eurozone. It represents the average rate at which European banks lend to each other for different time periods (1 week, 1 month, 3 months, 6 months, 12 months). The European Central Bank's key interest rates directly influence the Euribor.
When the ECB raises its key rates to combat inflation, Euribor rises and variable rate mortgage payments increase across the Eurozone. When the ECB cuts rates, Euribor falls and variable rate payments decrease.
In the UK, the equivalent reference rate is SONIA (Sterling Overnight Index Average), which replaced LIBOR in 2021. In the United States, the benchmark is the Federal Funds Rate and SOFR (Secured Overnight Financing Rate).
Numerical comparison over a loan term
Variable rate = 2% + 1,5% = 3,5%. Monthly payment at 3,5%: 200.000 x (0,00292 x (1,00292)^300) / ((1,00292)^300 - 1) = 1.023. Fixed payment at 4%: 1.056. Difference: 33 per month x 300 months = 9.900 total saving for variable. If rates remain stable, variable is cheaper. The 0,5% premium for fixing costs 9.900 over 25 years.
If Euribor rises to 4,5%, variable rate becomes 4,5% + 1,5% = 6%. New monthly payment on remaining balance after 3 years (approximately 193.000) at 6% for 22 years: approximately 1.370. The variable rate borrower pays 314 more per month than the fixed rate borrower for the remaining 22 years: 314 x 264 months = 82.896 more. Even accounting for the early saving, the fixed rate proved substantially cheaper.
Compare loan costs at different rates
Enter your loan amount and compare the total cost at different interest rates to model fixed vs variable scenarios.
Fixed vs variable — key differences
| Feature | Fixed Rate | Variable Rate |
|---|---|---|
| Payment certainty | Complete — same every month | Partial — changes with market |
| Rate level | Higher (includes risk premium) | Lower starting rate |
| Risk carrier | Lender absorbs rate risk | Borrower absorbs rate risk |
| Best when rates | Are low and expected to rise | Are high and expected to fall |
| Budget impact | Predictable — easy to plan | Variable — requires buffer |
| Typical premium | 0,5% to 1,5% above variable | 0% premium — market rate |
Which to choose and when
The choice between fixed and variable depends on three factors: the current interest rate level, your expectations for future rates, and your financial resilience.
Fix when: interest rates are at historically low levels and likely to rise. You cannot absorb payment increases without financial stress. Your budget has little margin. The fixed rate premium is modest relative to your expected rate rises.
Choose variable when: interest rates are high and likely to fall. You have substantial financial reserves to absorb payment increases. The fixed rate premium is large. You plan to repay the loan early or sell the property within a few years, making a long fix less useful.
A common middle approach in Europe is a partial fix: fix for 5 to 10 years on a 25-year mortgage to get short-term certainty, then reassess at the end of the fixed period. This reduces the premium paid for certainty while protecting against the most immediate rate volatility.
Common mistakes
Methodology
All payment calculations use the standard amortization formula with monthly compounding. Euribor data references ECB published rates. Rate comparison scenarios assume rates change instantaneously for illustration purposes. Real-world rate changes typically occur at periodic reset dates.
This guide is for educational purposes. Interest rate decisions should account for your specific financial circumstances, risk tolerance, and professional advice.
Model your loan at different rates
Use the amortization calculator to see exactly how your monthly payment and total cost change at different interest rates.
Frequently asked questions
Formula based on standard mathematical and financial methods. Results are for informational purposes. Last reviewed May 2026. Version 1.