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Wait! Before you rush to fix your home loan interest rate, know this...

Before fixing your home loan interest rate, one must understand how the rates will be calculated. Photo: Andrea Piacquadio/Pexels

Before fixing your home loan interest rate, one must understand how the rates will be calculated. Photo: Andrea Piacquadio/Pexels

Published May 25, 2022

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Last week’s interest rate hike of 0.5% was a shock for many homeowners, and has scared them into believing that they need to fix their interest rates, and fast.

After all, it was initially thought that the rate would only increase 0.25% after each Monetary Policy Committee meeting this year.

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But if you are one of these homeowners, or even a new or aspiring buyer, you need to fully understand what fixing your interest rate entails, and the impact it can have on your home loan repayments for an extended period of time.

Carl Coetzee, chief executive of BetterBond, says there is not a simple answer when it comes to evaluating the benefits of a fixed interest rate or a variable interest rate that fluctuates in line with the repo rate. Each buyer’s financial situation and circumstances are unique.

“When applying for a home loan, it is by default on the basis of a variable interest rate. Only once your bond has registered can you apply for a fixed interest rate and there is a strict time limit attached before the offer lapses.”

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While the 0.5% increase will have an impact on monthly bond repayments, and how much aspirant buyers will be able to afford, he says it is worth noting that the prime lending rate is still considerably lower than it was two years ago before the pandemic.

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“The monthly repayment on a R2 million home at the start of 2020 when the prime lending rate was 10% was R2 259 more than it will be at the current 8.25%.

“Furthermore, there are ways to buffer the impact of rate changes.”

Coetzee says that working with a bond originator who will negotiate with the banks on a buyer’s behalf to secure a better rate will help soften the blow of this and subsequent rate increases. Illustrating this, he says BetterBond’s average interest rate concession when applying to four banks is 0.61% .

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“On a R2 million bond, for example, this means that a 0.61% concession on the current prime interest rate of 8.25% would reduce the monthly bond repayment by just over R750. And, if this revised monthly payment is compared with what a homeowner would have paid in 2020, the saving is a significant R3 016.”

While market conditions are useful, he says it is important to note that past trends are not always good indicators of future performance and rate fluctuations are to be expected.

“The determining factor when it comes to deciding on whether to fix the interest rate on your bond should always be affordability.”

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Paul Stevens, chief executive of Just Property notes that, right now, a fixed interest rate will “almost certainly be higher” than a variable rate so one 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.”

He says interest rates are expected to rise gradually until 2024.

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

If this is the case, then the interest rate will be 10% by the end of 2024.

Berry Everitt, chief executive of the Chas Everitt International property group, says homeowners 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.

For example, if this premium is 2%, then anyone who is currently being charged an interest rate of 8.25% on their home loan would have to pay at least 10.25% 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 10.25%.

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However, if one could afford the additional amount, and they were to use it, instead, to reduce the capital portion of their bond while staying on a variable interest rate, Everitt says amortisation tables show that they 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.”

Knowing that more interest rate hikes are forecasted for the year ahead, Adrian Goslett, chief executive of RE/MAX of Southern Africa, notes that the question of whether to fix the interest rate on a home loan has come up more frequently.

“The truth is that there are so many unknown variables around interest rate fluctuations that it is impossible to tell with absolute certainty whether fixing your interest rate now will be more beneficial for you in the long run.”

If you’re 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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