Should you fix your rate?

WHILE the current prime interest rate is still considered to be comparatively low, former Reserve Bank governor Gill Marcus has forewarned the South African public that we are currently in an increasing rate cycle and consumers should expect to see further rate hikes in the future.

Considering this, it is no wonder that many homeowners are contemplating fixing the interest rate on their bonds, says Adrian Goslett, the CEO of RE/MAX of Southern Africa.

Who would benefit from a fixed interest rate? Goslett says for homeowners who are risk averse or who want to have a fixed bond repayment that they can include into their budget with no surprises, a fixed rate is definitely a viable option to take into consideration. “It is a particularly good option for homeowners that can’t have any variations in their budget due to fact that they are currently stretched to the limit financially and will not be able to handle any further repayment increases for a fixed period,” adds Goslett, who points out that a home loan rate can generally only be fixed for a maximum period of five years, depending on the financial institution.

According to Goslett, while there are benefits for homeowners who would like to fix their bond rate, there are a few elements that should be considered before they make their decision. He notes that although a fixed rate will mean that the homeowner’s monthly bond repayment will not increase over the agreed period of time while the rate is fixed, it is important to note that a fixed rate is on average around 2,5% higher than the current prime rate.

“The fixed rate percentage given to a homeowner can vary depending on the terms of the contract and the bank at which the home loan is held, however homeowners can expect to pay a higher rate than the prime rate,” says Goslett. “While fixing the interest rate will provide some cushion for homeowners if there are successive rate hikes over the term of the

contract, if there are no or limited rate hikes, the homeowner will have paid more for their bond than those who have their bonds linked to the prime lending rate. In order for the homeowner to really see a reasonable benefit of fixing their rate, the prime interest rate would have to increase by at least 3% to 4% during the contract period.”

He adds that when looking at the past history of the interest rate cycle, we can see that the general fluctuation is around the 5% mark over a five-year period. Even though interest rates are expected to increase as inflation continues to place pressure on the Reserve Bank, with the current economic climate there are doubts that we will see an increase as high as 5% over the next five years, however the possibility cannot be ruled out entirely.

Goslett says fixed interest rate agreements generally range between one and five years with exceptions given by certain financial

institutions. Once the period has expired, the home loan will automatically revert to the prevailing home loan variable rate. He notes that if a homeowner wishes to do so, they can apply for a new fixed rate contract a couple of days before their contract has expired, however the new contract will be negotiated on the current prime interest rate at the time. The fixed rate option will end once the property is sold or the bond is fully paid up.

“While it depends from one bank to the next, there are instances where a homeowner can cancel their fixed rate contract by giving notice, however the cancellation could be subject to an early termination interest, or a penalty that will be charged to the account. Homeowners will need to check what options are available to them and whether an administration fee will be charged to a fixed rate contract before signing,” says Goslett.

According to Goslett, it may be more beneficial for homeowners to pay the extra money they would pay when fixing their rate directly into their bond. This will reduce their loan period as well as the capital amount owed. “Reducing the loan period is just as important as the interest rate for homeowners to take into consideration. Aside from reducing the term of the loan, it will also decrease the total interest paid over that period.”

Goslett says many consumers have interest-bearing debt, so the best way to alleviate the stress of increasing interest rates is to pay off all high interest, short-term debt as soon as possible.