An interest rate swap in which the fixed rate leg is only payable on a specific percentage of its notional principal amount. The remaining percentage is assigned as the floating rate leg. The fixed portion of this swap increases as the reference floating rate (LIBOR) moves up according to a predetermined resetting schedule. In other words, the fixed-rate payer pays the swap rate on a resettable notional amount. Since it is not always applied to the notional amount in whole, the incremental fixed swap rate is relatively much higher than that of a vanilla or regular swap.

This swap is mainly instrumental to floating rate borrowers who expect interest rates to remain considerably below the level at which the fixed rate is payable on a large proportion of the notional amount. Like an interest rate cap, the incremental fixed swap places a ceiling on a cost of funds, but contrary to a regular cap which requires an upfront premium, a fixed rate payer pays a higher swap rate for the protection this swap provides against substantial rate rises.

The incremental fixed swap is also known as a blended interest rate swap, an index fixed swap, or a self-regulating swap.