Here is why it may not be a good idea to fix your home loan interest rate just yet

Durban - With interest rate hikes expected to be ongoing, many home owners are wondering if they should fix their home loan interest rates now to avoid continual bond repayment increases.

And if you are one of them, you need to fully understand what this choice entails and the impact it can have on your home loan repayments for an extended period of time.

Carl Coetzee, chief executive of BetterBond, explained home loans were awarded, by default, on the basis of a variable interest rate.

“Only once your bond has been registered can you apply for a fixed interest rate and there is a strict time limit attached before the offer lapses.”

However, while market conditions were always a useful guide, he said “the most important factor when deciding on whether to fix the interest rate or not should be affordability”.

Paul Stevens, chief executive of Just Property noted that, right now, a fixed interest rate would “almost certainly be higher” than a variable rate so you should rather get indicative proposals from the lending institutions.

“If you are applying for a bond, comparing fixed versus variable interest rate options is a worthwhile exercise. From there, you can apply the options to your appetite for risk/uncertainty and future prospects.”

Coetzee agreed: “Generally, a fixed interest rate is higher than a variable rate as it poses more of a risk to the bank. It is only negotiated at the time of bond registration and the rate offered is dependent on the going rate at that specific time.”

Stevens said interest rates were expected to rise gradually until 2024, with industry predictions suggesting three or four hikes in 2022.

“The repo rate is expected to return to its pre-pandemic (end-2019) level of 6.5% by the close of 2024.”

Berry Everitt, chief executive of the Chas Everitt International property group, says home owners and prospective buyers must also be aware that most banks will charge borrowers a premium to fix the interest rate on their bond – and will also usually only fix a rate for a minimum of two years.

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For example, if this premium is 2%, then anyone who is currently being charged an interest rate of 7.75% on their home loan would have to pay at least 9.75% for at least the next two years if they switched to a fixed rate option.

The effect of this premium would increase the minimum monthly repayment on a home loan, which would be money wasted unless the variable rate applicable to that home loan also rose to 9.75%.

However, if you could afford the additional amount, and you were to use it instead to reduce the capital portion of your bond while staying on a variable interest rate, Everitt says amortisation tables show that you would stand to lower the total balance outstanding.

“This means that if, and when, interest rates do start to rise again, your minimum monthly bond repayment will be calculated on a much lower capital balance.”

If you’re still unsure, Rhys Dyer, chief executive of the ooba Group, gives a quick rundown of the pros and cons of each approach.

Variable interest rate:

• Pro: If the prime interest rate goes down in response to market forces, the interest on your home loan goes down with it, and you save money.
• Con: On the other hand, if the prime interest rate goes up, so do your repayments. The fluctuating interest rates can make it difficult to budget accordingly.

Fixed interest rate

• Pro: You keep paying the same home loan repayment amount monthly, regardless of fluctuations in the market, for an initial agreed period. You will thus be able to factor your repayments into your budget with 100% accuracy.
• Con: A fixed interest rate may be less of a risk for you, but it’s more of a risk for the bank, so they’re likely to charge you a higher rate.
• Con: Fixed interest rates expire after the initial agreed period, after which you will either have to revert to variable interest rates, or negotiate a new fixed rate with the bank.
• Con: The option of a fixed interest rate for the initial agreed period is only offered after bond registration, so you cannot factor this into your planning upfront.

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