Should you fix your home loan interest rate?

By Staff Writer
Nicolette Dirk, finance writer, 
Fixing interest rates could be a way to boost the affordable housing market. This is according to Marius Marais, CEO of FNB housing finance, who said that fixing rates is ideal for people buying in the affordable housing range, which is up to R600 000. 
“Our market comprises of 96% first-time home owners. Due to affordability issues, these customers generally gear their loan to the maximum in order to purchase an entry level house, which makes them the most vulnerable to changes in the interest rate,” said Marais.
How affordable are fixed rates?
Fixed rates are generally a few percentage points above the customer’s variable normal bond rate. 
Steven Barker, head of home loans at Standard Bank, said this is because it includes a premium for the certainty of not having your interest rate move during that period. 
“Current fixed rate offers in the market could be in the region of 11% to 13% depending on the term of the fixed rate contract and rates will continue to change according to market conditions,” said Barker.
“Iinitially, the customer will pay a higher rate, however, this will most likely be offset over time as rates increase,” added Marais. 
On a R500 000 loan, at prime (9%) plus 1% (10%), a customer will be paying R4 825. At a fixed rate, assuming it is 2% above this, a mortgage lender will be paying R5 505, which is R680 more. But as the interest rate goes up, this gap will close by R335 for every percentage rate increase.  In the last four cycle rates, since 1994, the rates increased on average by four to five percent.
“No one knows exactly what is going to happen with interest rates, and the potential downside is that the rates don’t move up past two percentage points, so it is up to the customer to decide whether or not to fix their rate,” said Marais. 
Different banks offer different periods that customers can fix their rates for.  FNB Housing Finance offers a five year fixed rate. 
“If you measure the starting and ending point of cycles they generally go in four to five year periods, hence our decision to offer a five year fixed rate period,” said Marais.
He added that usually within, five years households see an increase income and the customer is in a better cash flow position than when they were new to the market, which is why interest rates are only fixed in five year cycles. At the end of the fifth year customers can then decide whether to fix again or to deviate to the variable rate.
What about renting?
Francois Venter, director of Jawitz Properties, said the recent 50 basis points increase in interest rates, could place pressure on some buyers and homeowners in the residential property space, and result in a surge of demand for rental properties. But this may also lead to an increase in rental fees.
“Some homeowners may look to renting out their properties to make ends meet and move into smaller properties. While costs continue to rise, renting may also be the only option for many prospective buyers,” said Venter. 
Venter believes the recent interest increase shows that the interest rate cycle has bottomed out and the only way forward is up. This could make banks tighten their lending criteria, making it even harder for buyers to get bonds.
Is it still worthwhile to buy?
Households usually feel the pressure of an interest rate hike four to six months down the line. 
“Ultimately when interest rates go up, property prices tend to slow because demand can drop.  However, because of the economic pressures most South Africans are facing, we feel the demand for rentals, and thus rental yields, is likely to go up,” he said.
But he added that it is still a historically low interest rate environment, even with the increase. Before 50 basis point increase, the recent prime rate of 8.5% has been the lowest interest rates have reached in the last 20 years. The highest was 25.5%, which was in 1996. 
This means that buyers will still be looking to purchase, even if it is slightly more expensive than before. “But some buyers, particularly in the lower end of the market may be cautious and sit on the fence for a while,” said Venter.

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