By Ashleigh Brown, journalist, Justmoney
The country is in an increasing rate cycle, warned Gill Marcus, the governor of the South African Reserve Bank and that it can be expected that interest rates will rise again. With this in mind, many homeowners are considering fixing the interest rates on their bonds.
John Loos, household and property sector strategist for First National Bank (FNB) highlighted that the decision to fix rates or not should rest on how much certainty consumers would like over their cash flow.
A home loan rate can generally only be fixed for a maximum period of five years, depending on the financial institution. However, this can give homeowners peace of mind as it means that there will be no changes to their home loan instalments for a fixed period.
Andrian Goslet, CEO of RE/MAX says: “It is a particularly good option for homeowners that can’t have any variations in their budget due to fact that they are currently stretched to the limit financially and will not be able to handle any further repayment increases for a fixed period.”
Fixing rates
“Now there is no right or wrong when it comes to fixing rates. But it is perhaps important to consider some important factors when deciding whether or not to fix rates, as well as to point out that the usual times when people normally rush to fix rates, i.e. when interest rates are beginning to rise, are not always when one gets the ‘best deals’,” says Loos.
The decision to fix rates or not also depends on the type of risk-appetite you have. If you don’t like taking risks then fixing interest rates would help you to “sleep peacefully at night.” However, someone who enjoys more risk (or who can stretch themselves financially in the event of a rate increase)might want to take the chance that the interest rates will come down, and thus not fix theirs.
Justmoney wrote a story on interest rate hikes effects on the property market earlier this year. Steven Barker, head of home loans at Standard Bank highlighted that “home owners need to be mindful that the fixed interest rate will often be slightly higher than the variable interest rate because it includes a premium for the certainty of not having the interest rate move during that period.”
Fixing the interest rate on your home loan is only worthwhile if you believe that interest rates are going to go up exponentially over the next couple of years. However, doing this comes at a price. Goslet warns that a fixed rate, on average, is around 2.5% higher than the current prime rate.
“While fixing the interest rate will provide some cushion for homeowners if there are successive rate hikes over the term of the contract, if there are no or limited rate hikes, the homeowner will have paid more for their bond than those who have their bonds linked to the prime lending rate. In order for the homeowner to really see a reasonable benefit of fixing their rate, the prime interest rate would have to increase by at least 3% to 4% during the contract period,” explains Goslet.
Time is of the essence
Fixed interest rate agreements normally run between one and five years, depending on the financial institution. Once the agreement period has expired, the home loan will automatically revert to the main home loan interest rate.
Homeowners can renew their fixed rate agreement. Normally you can so a few days before the old agreement ends. However, Goslet warns that the the new agreement would be calculated on the new rates.
When the contract ends some home owners may feel that they want to cancel their fixed rate agreement. “While it depends from one bank to the next, there are instances where a homeowner can cancel their fixed-rate contract by giving notice, however the cancellation could be subject to an early termination interest, or a penalty that will be charged to the account. Homeowners will need to check what options are available to them and whether an administration fee will be charged to a fixed rate contract before signing,” says Gosling.
Unfortunately, the best time for fixing rates has come and gone. Commentators explain that when rates were going down and there was no indication of them coming back up again then homeowners can usually get a good deal from the banks.
“While the human instinct is to look for fixed rates during phases when the SARB has already started hiking interest rates, those may not be the times when one obtains the most attractive fixed interest rates. Rather, it is often in times of interest rate cutting or in periods of low sideways movement in interest rates, prior to widespread expectation of imminent rate hikes, that the better fixed rate deals are probably going to be found,” says Loos.
Tips
If you are looking to apply for a home loan, but are not sure what steps to take, Justmoney has a guide to help you, click here.
For more information on fixed interest rates, click here.