Guiding consumers since 2009

Should you fix your home loan interest rate?

By Jessica Anne Wood

The economy is in constant flux, which can have an impact on the interest rate. However, the South African Reserve Bank (SARB) has stated that it aims to keep interest rates at the same level. Added to this is the belief that we have reached the peak of the rate hiking cycle. This could make home owners reluctant to fix their home loan interest rates. Yet there are a number of factors that could see the SARB having no choice but to increase interest rates further.

Tommy Nel, head of credit at FNB Home Loans, noted: “Although there’s a good chance that interest rates may have peaked; consumers still need to tread with caution due to possible risks of further downgrades to our sovereign credit ratings. Therefore, home owners may find current fixed interest rates on offer quite generous and it could provide some good protection to borrowers who want peace of mind knowing that their home loans repayments will remain unchanged for a period of up to five years into the future.”

Fixing your home loan interest rate

As much as fixing your interest rate could save you money if interest rates were to increase over the fixed rate period, this shouldn’t be seen as a way to save money. Nel stated that this should rather be viewed as a personal cash flow management option.

“When taking up fixed rates it is important not to try and time or beat the market. It should be more of a risk based decision to try and protect your home as one of the most important assets you may own,” Nel suggested.

While fixing your interest rate can see you saving money if the SARB increases the repo rate, if they embark on a reducing cycle, you could end up paying a higher interest rate with your fixed interest rate than the reduced interest rate from SARB.

“However, you shouldn’t beat yourself up about getting such a call wrong if it serves to mitigate the risk of not being able to pay your bond if rates increased,” added Nel. 

Hesitant to fix your interest rate

If you are hesitant about making the commitment to fix your home loan interest rate, Nel advised speaking to your bank and trying to get a favourable interest rate when you apply for the home loan. He pointed out that banks and other home loan providers consider the risk when assessing loan applications. This involves considering how much they could lose in the event that the property is foreclosed.

One way you can reduce the risk when you apply for a loan is to pay a higher deposit. Nel revealed that the bank could offer you a more favourable interest rate, as their exposure to ruck would therefore be reduced.

Having a good credit record can also help mitigate the risk you pose when applying for a loan. “You may have heard this over a thousand times, but the impact shouldn’t be underestimated,” noted Nel. (For more information on how to improve your credit record, click here.)

There are also a few things you should consider when taking out the initial home loan. For example, Nel highlighted that opting for a longer repayment period, such as 30 years, could see you having a lower monthly repayment, but in the long run, you are likely to pay 64% more in interest compared to a shorter term home loan, such as 20 years. A longer term home loan may also attract a higher interest rate.

You can reduce your interest repayments by paying more than the monthly minimum payment each month. Nel stated: “Paying a bit extra on your home loan every month will not reduce the interest rate, but will help you reduce the principle debt that the interest is calculated on.”

For example, paying R1 000 extra every month on a R500 000 home loan for 20 years at an interest rate of 10.5%, could save you R296 000 in interest payments and reduce your repayment term to 13 years, revealed Nel.

Before taking the plunge and fixing your interest rate, speak to a qualified financial advisor who will be able to help you make the best decision for your situation and finances.

 

 Handy tip: Need to apply for a home loan? You can apply here with one of Justmoney’s partners.

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