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How to choose between fixed and variable rate loans

Author

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  • Edwin O. Fischer

    (Institute of Finance, Karl-Franzens-University Graz)

  • Lisa-Maria Kampl

    (Institute of Finance, University of Graz)

Abstract

The current low interest rate landscape influences the decision whether to secure these low long-term interest rates with a fixed rate agreement or to benefit from the current negative short-term rates with a variable rate loan. The decision is based on expected future interest rates. We propose two criteria, namely the effective interest rate and the total repayments, to decide what type of loan is more advantageous. In this context, we also present the effects of varying future interest rates on the three selected repayment agreements; i.e. lump sum, constant principal and annuity repayments.

Suggested Citation

  • Edwin O. Fischer & Lisa-Maria Kampl, 2018. "How to choose between fixed and variable rate loans," Working Paper Series, Social and Economic Sciences 2018-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
  • Handle: RePEc:grz:wpsses:2018-04
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    File URL: https://static.uni-graz.at/fileadmin/sowi/Working_Paper/2018-04_Fischer_Kampl.pdf
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    Cited by:

    1. Edwin O. Fischer & Lisa-Maria Kampl & Ines Wöckl, 2019. "On the Valuation and Analysis of Risky Debt: A Theoretical Approach Using a Multivariate Extension of the Merton Model," Working Paper Series, Social and Economic Sciences 2019-02, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.

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