A mortgage loan with a periodically fixed interest rate during a cycle of interest rate changes

In recent years, many borrowers have painfully learned how strongly changes in interest rates affect the amount of their instalments. Dynamic decisions of the Monetary Policy Council translated into higher reference rates, such as WIBOR, and consequently into sharp increases in monthly liabilities. The choice of the type of mortgage loan interest rate is no longer solely a cost-related decision, but is becoming an element of household financial risk management. Under such conditions, mortgage loans with a periodically fixed interest rate are attracting growing interest. How do they work in different phases of the interest rate cycle and when can they be a beneficial solution?

What is a mortgage loan with a periodically fixed interest rate?

The mechanism of a periodically fixed interest rate is based on temporarily “freezing” the interest rate for a predetermined period, most often five years, less frequently seven or ten years. During this period, the borrower repays the liability according to a schedule based on an unchanged rate determined at the time the agreement is concluded or at the beginning of a given fixed-rate period. Structurally, the interest rate still consists of the bank’s margin and a market component; however, the latter no longer functions as a variable index and instead takes the form of a fixed value calculated on the basis of market expectations regarding the future level of interest rates.

Differences between a loan with a variable interest rate and one with a periodically fixed interest rate

The basic difference between a loan with a variable interest rate and a loan with a periodically fixed interest rate lies in the method of determining the interest rate over the term of the loan agreement.

In the case of a loan with a variable interest rate, the interest rate depends on two elements: the bank’s fixed margin and the variable reference rate of the interbank market. This means that the amount of the loan instalment may change during the repayment period, both increase and decrease, depending on decisions concerning interest rates.

By contrast, a loan with a periodically fixed interest rate is characterised by the fact that the interest rate remains unchanged for a period specified in the agreement. During this period, the instalment amount is fixed and independent of current interest rate changes. After the fixed-rate period ends, the borrower may choose a new fixed rate for the next period or switch to a variable rate.

The most important consequence of this difference is the level of risk borne by the borrower. In a variable-rate loan, a greater share of the risk associated with changes in interest rates rests with the customer. Meanwhile, a loan with a periodically fixed interest rate allows for a temporary reduction of this risk by guaranteeing an unchanged instalment amount.

Growing interest in loans with a periodically fixed interest rate

With the beginning of the cycle of interest rate increases, there was a noticeable rise in interest in loans with a periodically fixed interest rate. Borrowers began to look for solutions that would allow them to protect themselves against further increases in financing costs.

The greatest intensification of this phenomenon was recorded in the first months of 2022. During this period, the share of loans granted with a periodically fixed interest rate reached its highest level compared with previous quarters. The increase in interest resulted primarily from growing awareness of the risks associated with variable interest rates, as well as the rapid rise in loan instalments observed in households.

CHART 1. INTEREST RATE STRUCTURE BY NUMBER OF GRANTED LOANS: VARIABLE VS. FIXED (IN %)

source: Authors’ own study based on data made available by the banking sector

It is worth emphasising that the increase in interest in the “safer” loan was already visible in the first quarter of 2022, while the largest increase in sales was recorded in the second quarter. In practice, however, a significant portion of these loans was granted on the basis of applications submitted earlier. This means that the mortgage market’s response to changes in monetary policy was partially delayed, which resulted from the fact that the loan granting process itself usually takes from several weeks to even few months.

Why is the difference between fixed and variable loan interest rates decreasing and what does it really mean?

Until recently, the difference between fixed and variable interest rates was clearly greater and represented the price of security. Currently, the market expects that the interest rates set by the National Bank of Poland may still decline in the future, which causes both variable and fixed interest rates to move closer to each other. Additionally, inflation remains at a low, stable level, which means that banks no longer need to add a large risk premium to fixed-rate loans.

It is worth emphasising, however, that the convergence of interest rates does not result from the “goodwill” of banks, but from their own calculations and their desire to hedge risk – banks adjust loan pricing to the anticipated decline in the cost of money in order to maintain profitability regardless of future interest rate changes.

CHART 2. AVERAGE INTEREST RATE ON HOUSING LOANS

source: AMRON-SARFiN Report 4/2025 (https://amron.pl/en/raport/amron-sarfin-report-4-2025/)

Fixed rate – for who it is a good solution?

Fixed interest rates are best suited to people, who value stability and predictability. They are particularly beneficial for households with limited budget flexibility, for which a sudden increase in instalments could lead to serious financial problems.

Fixed interest are also a good solution for people, who plan long term, for example families raising children, who want certainty regarding their expenses in the near future. In such cases, stability often has greater value than potential savings. In times of considerable uncertainty, even with the current declines in interest rates it is worth remembering that the market may change direction from one day to the next.

By contrast, people with a higher tolerance for risk, higher incomes or a more flexible financial situation may prefer variable interest rates, counting on the benefits resulting from interest rate cuts.

Summary

In a cycle of interest rate increases and decreases, a loan with a periodically fixed interest rate is not a “better” or “worse” solution – it is a tool for managing the borrower’s own risk. In a period of rising rates, it acts as protection against a sharp increase in the instalment. In a period of falling rates, it means giving up part of the potential savings in exchange for earlier security. The final choice should depend not only on market forecasts, but above all on the borrower’s individual risk tolerance and financial stability.

Joanna Woźniak
AMRON Maintenance and Development Specialist
SARFiN Data Administrator