TO FIX, OR NOT TO FIX, YOUR HOME LOAN INTEREST RATE

The two recent hikes in interest rates, as well as the anticipation that further increases will continue into 2023, are prompting homeowners to consider fixing their home loan interest rate. But is that the best decision for you?

The potential increase in interest rates will cause stress on household incomes and could result in defaulting on mortgage repayments. Each person's financial situation and individual circumstances are unique, but it is nevertheless important to review one's budget to allow for sufficient surplus funds to provide for such increases. It is appropriate to consider current market conditions and the advantages and disadvantages of fixed versus variable rates, and whether to fix the interest rate on your mortgage at this point in time.

A variable interest rate means that the rate will go up and down depending on the current rate at which the South African Reserve Bank charges commercial banks to borrow money (repo rate). Variable rates are the default option for home loans.

A fixed rate must be applied for and means that the interest rate will stay the same for a predetermined period regardless of fluctuations in the repo rate.

Pros and cons.
Variable interest rate:
You will save money when there are rate cuts; you pay less per month on your home loan. It means that the rate you repay will fluctuate over the term of your home loan, in line with repo rate changes. When the rate goes up, you will pay more.

Fixed interest rate:
You will be able to budget with more accuracy because your rate is fixed regardless of market fluctuations. As a general rule, a fixed rate will be higher than the prevailing variable rate because it poses a higher risk for the lending institution. The rate will only be fixed for a short period (24 - 60 months) after which it will revert to variable interest rates. Something to consider is that you may not opt out during the fixed term, so should interest starts declining you will not have the benefit of lower rates. Although fixed rates will give you peace of mind and easy management of your budget during the period, you cannot factor this into your upfront planning as the option of fixed rates is only offered after the bond has been registered.

Most people only begin to consider fixing their rates when the interest rate starts to rise just to find out that it is too late to get the best rate because fixed rates are largely linked to market expectations for rates going forward. The best time one will possibly be offered the best fixed interest rates on a home loan is when interest rates have started a downward trend and further cuts are being forecasted.

It is hard to predict how many increases will be announced and how quickly in succession they will be, but it is probably safe to say that you have missed the boat if you have not applied for a fixed rate yet.