Fixed Rates

What is a Fixed-Rate Loan?

A fixed-rate loan locks in an interest rate at the outset for a fixed term, ensuring it remains unchanged for the duration of the loan. SyntheticFi offers fixed-rate terms ranging from 3 months to 5 years. These loans functionally behave like a zero-coupon bond; both the principal and total interest are due as a lump sum at the end of the term. So if you take out a $500K loan with 4% interest and 2-year term, then you don't pay down the loan for the 2-year period. After two years, you will be expected to pay $540K—$500K base plus $40K in interest.

However, the principal amount due could be refinanced with a subsequent loan, effectively making the loan interest-only. Alternatively, the combined principal and interest can be refinanced, making the loan cost-free.

Differences Between Fixed-Rate Loans and Floating-Rate Loans

Floating-rate loans have interest rates that vary based on market conditions, adjusting every month. The loans themselves are structured as a line of credit, meaning you can draw more or repay at your convenience. Floating-rate loans are suitable for short-term borrowing—where interest rate fluctuations are likely moderated—or situations where it's more important to retain the freedom to increase or pay down debt when it's convenient. By contrast, fixed-rate loans prioritize stability. They are protected from volatility in interest rates, but they have a rigid repayment expectation. This makes them ideal for long-term commitments where predictability trumps flexibility.

What about differences in interest rates? Technically speaking, SyntheticFi's floating-rate and fixed-rate loans are mathematically equivalent. When rate cuts by the Fed are expected, a common misconception is that borrowing with floating rates is a better choice, even if the initial rates are higher than fixed rates. However, markets tend to be efficient in this respect, pricing longer-term rate cuts into the current interest prices. Therefore, if expectations about the market turn out to be accurate, then the borrowing cost between floating and fixed rate loans becomes roughly equal. To learn more about how these interest rates are determined, read our article about how SyntheticFi loans work.

(If you're a financial advisor looking for more information about deciding between floating and fixed rates for your client, refer to this article.)

When To Choose Fixed-Rates

The cornerstone of fixed-rate loans is predictability. With a set interest rate, you can calculate your exact repayment amount and date from day one, unaffected by market volatility. This stability is particularly valuable for long-term financial planning, because you don't have to deal with the uncertainty of fluctuating rates. Here's a list of common use cases where fixed-rate loans shine:

To Buy Real Estate, as a Mortgage Replacement

Buying a property (primary residence, second home, vacation property, etc.) often comes with long-term commitments, whether you're borrowing to put cash down or purchasing with cash outright. SyntheticFi's fixed-rate loans are shielded from interest rate fluctuations due to market volatility, so you can confidently budget the borrowing expenses.

Consider Tony, a senior software engineer with a $3MM portfolio, who wishes to purchase a $1.5MM vacation home in Lake Tahoe. Through SyntheticFi, Tony secures a $1.5MM fixed-rate loan with a 5-year term at a 4% interest rate. This locks in his total repayment at $1.8MM ($1.5MM principal plus $300K interest), due at the end of the 5 years. Knowing the exact cost upfront, Tony can plan his finances with certainty, unaffected by potential rises in market rates during the 5-year period. At maturity, he may repay the loan with portfolio gains or other cash flows (such as cash bonuses), or refinance the principal into a new loan (with either floating or fixed rates) to maintain liquidity.

To Fund Private Investment Capital Calls

When you're funding a multi-year investment, the assurance of fixed costs supports more precise forecasting and risk management, making it easier to align your borrowing with future cash flows or investment returns. You can use a SyntheticFi fixed-rate loan to invest in private equity funds, venture capital funds, etc. and match the loan term with the lockup period.

Imagine Sarah, a savvy investor with a $5MM personal portfolio, who wants to invest $1MM in a private equity fund with a 4-year lockup period. She takes out a $1MM fixed-rate loan from SyntheticFi with a 4-year term at a 4% interest rate. This locks in her total repayment at $1.6MM ($1MM principal plus $160K interest) at the end of the 4 years. The fund anticipates a net annual return of 12% and because Sarah's borrowing costs are known, she has more certainty about the profits (~8% annually) from her leveraged investment. At maturity, she can use the fund’s returns to repay the loan.

To Manage My Cashflow

Choosing a fixed-rate loan means deferring interest payments to the end of the loan term. This is useful for business owners and entrepreneurs who might have volatile cash flow in the interim, or who want to preserve their cash flow to reinvest in their enterprises. 

Take Emma, a small business owner with a $2MM portfolio, who needs $500K to expand her e-commerce business by investing in inventory and marketing. She opts for a SyntheticFi fixed-rate loan with a 3-year term at a 4% interest rate, locking in a total repayment of $560K ($500K principal plus $60K interest) due at the end of the term. The deferred payments gives Emma a strategic advantage when it comes to managing cash flow. She can allocate her cash flow to immediate business needs, such as hiring staff and scaling operations, without the pressure of monthly interest payments. At the end of the 3 years, when Emma's revenues have grown and stabilized, she can repay the loan using the profits from her expanded business. She can also refinance the principal to maintain liquidity.

If you already expect to receive substantial, predictable cash flow (e.g. an annual bonus) at a known time in the future, then with a fixed-rate loan, you can align the term to repay the fixed principal and interest as a lump sum at your liquidity event.

Consider Alex, a corporate executive with a $4MM portfolio, who anticipates a $750K bonus at the end of the year. To fund a $600K renovation of his primary residence now, Alex secures a SyntheticFi fixed-rate loan with a 1-year term at a 4% interest rate. This locks in a total repayment of $624K ($600K principal plus $24K interest) due at the end of the year. By aligning the loan term with his expected bonus, Alex can confidently proceed with the renovation. He doesn't have to worry about recurring interest payments. His repayment will be covered by the bonus without impacting any of his current cash flow.

Strategies for Loan Repayment

Some people might want the assurances of a fixed-rate loan with some of the flexibility of a floating-rate loan, especially when it comes to repayment. Here are some strategies they could help them:

• Regular Saving: You can pay off a fixed-rate loan like a mortgage with regular payments by using those payments to build a capital buffer, e.g setting up a savings habit to buy treasuries, which would offset much of the interest charged on the principal.

  Suppose Tony takes out a 5-year $1MM loan against a $2MM portfolio via SyntheticFi to buy a house. After the first year, he can put back $200K in treasuries. Even though he's not "paying off" the loan, he's 1) earning a pretty high yield on the treasuries, and 2) creating a larger "buffer" against his margin. Originally, he was borrowing 50% against his portfolio; now he's only borrowing $1MM/2.2MM = ~45% of his portfolio.

  
  

• Laddering: SyntheticFi offers a “laddered” approach, similar to a bond ladder. For example, you can ladder SyntheticFi fixed-rate loans, with expirations ranging from one to five years, each 20% of the total loan value, enabling a 20% annual paydown.

• Rolling: People with unpredictable cash flow (e.g. entrepreneurs), can continually refinance fixed-term loans. When one loan ends, they can repay the interest and roll the principal into a fresh fixed-rate loan, or they can choose to combine the principal and interest into the new loan.

What to Watch Out For

While fixed-rate loans offer clear benefits, there are trade-offs to consider:

• Limited Flexibility: Fixed-rate loans require the full principal and interest to be repaid at the end of the term, with no option to draw additional funds or make partial repayments during the term. Closing out a loan early exposes you to interest rate differential risk. However, the strategies discussed in the previous section can mitigate some of the problems.  

• Opportunity Cost: By locking in a fixed rate, you may miss out on potential savings if interest rates fall beyond market expectations during the loan term. Additionally, tying up your portfolio as collateral could limit your ability to use those assets for other investment opportunities. Weigh the benefits of predictability against the potential for missed opportunities.

Wrapping Up

Fixed-rate loans deliver stability and predictability when planning for the long term. By locking in borrowing costs, these loans support strategic decisions in real estate, private investments, and cash flow management. While floating-rate loans offer adaptability for shorter horizons, fixed-rate options provide peace of mind in an uncertain market. To tailor a fixed-rate loan to your needs, schedule a consultation with SyntheticFi.