With interest rates at their lowest levels in 47 years, many people are buying property, and in some instances, banks are granting 100% loans. However, very few property buyers understand the fine print when it comes to the interest rates that are charged on home loans. One of the questions I am often asked is: Should I fix the interest rate on my home loan now that interest rates are at historic lows?
A home loan repayment attracts monthly interest. It is this interest rate (as indicated in your home loan agreement with the bank) that you want to keep as low as possible, whether it is variable or fixed.
When deciding on individual interest rates, banks look at the applicant’s risk profile. They consider factors such as a good credit record, and whether or not a deposit will be put down. Putting down a deposit reduces the amount of home loan you will need to finance your new purchase. This in turn, reduces the interest rate charged on the home loan over time. Similarly, a lack of deposit will increase the interest rate payable on your home loan.
To fix or not
Most people choose the variable interest rate, which decreases and increases as determined by the South African Reserve Bank. Since the beginning of 2020, the Reserve Bank has cut the prime lending rate by a total of 300 basis points. On 17 September, the Reserve Bank Monetary Policy left the repo rate unchanged at 3.5%, and the prime lending rate remains unchanged at 7% per annum.
It is this lowest cut to date that is making some people consider fixing the interest rate on their home loans. A fixed interest stays the same regardless of market movements – you know exactly what you pay every month for the duration of the fixed rate period.
The fixed rate period is not indefinite – after the initial period lapses, the bank will assess the individual risk profile again in order to fix the rate (if the customer so chooses), or the customer will revert to variable interest rate.
Banks also differ on the fixed period rate. For example, Nedbank customers can fix their rate for 18 months, whereas FNB offers customers a fixed rate of up to five years.
With the current low interest rate, it is not advisable to fix the rate because when rates are decreasing there will be no benefit since you will be paying a fixed rate, which may be higher than the variable rate. Consider this: since the interest rate cuts at the beginning of the year, your home loan repayments have come down, and this allows you to save money. When interest rates start to increase, it becomes a good idea to fix the rate, so that you will continue to pay the current low rate (at the time of fixing).
It is important to note that a bank can only grant the fixed rate after a bond has been registered. When choosing to fix your rate, make sure you fully understand the difference between variable and fixed in line with your requirements and financial situation. The fixed rate may be a good choice for you as a customer, but it may be risky for the bank, so the bank is likely to charge more to cover this risk. In this case, you might need to consider sticking to a variable rate of interest.
Whether to fix the rate or not is entirely in your hands. Ask questions about both choices to find the best option for you. Also be sure to compare banks, as they usually offer different rates. You might like the idea of using a mortgage originator such as ooba – think of them as your personal shopper on all matters relating to home loans – a service that is free of charge.