It’s the question on many a homeowner’s mind, especially those so financially stretched that they cannot withstand a hike in interest rates: should you or shouldn’t you fix the interest rate on your home loan?
This week, the monetary policy committee of the South African Reserve Bank (SARB) decided to keep the repo rate (the interest rate charged by the SARB when it lends money to the commercial banks) on hold at 5.5 percent. This means the prime interest rate that the banks charge you, the consumer, will remain unchanged. It is currently nine percent.
Given that the prime rate is at a 37-year low and that many believe interest rates are at the bottom of a cycle (meaning that the next move will be up), this could be the right time to fix your home loan interest rate.
To make an informed decision, you need to consider a number of factors, from the macro-economic to the personal. What’s your outlook on interest rates: do you expect them to start rising sooner rather than later? And how big is your appetite for risk: do you have job security and how much debt can you bear?
Fixing is something of a calculated risk – and it comes at a cost. When you fix, it is typically at anything from one to three percentage points above the variable rate, or prime rate, depending on the term and the bank. If interest rates rise, you score. If they fall, you forfeit the benefit.
Your bank may also charge you a fee to switch you from a variable rate to a fixed rate.
And, if your bank allows you to break the fixed-rate contract before the end of the term, it can charge you a penalty fee. This fee can be substantial, Pat Lamont, Nedbank’s general manager of home loans (sales and customer services), warns.
“The important factor in the decision to use a fixed rate or remain on a variable rate is whether interest rates will increase significantly in the next 12 to 24 months,” Kevin Penwarden, the chief executive of SA Home Loans, says.
“This is fairly subjective, and the customer needs to decide whether they can take the risk of rates increasing or not. If not, then they need to consider taking a fixed rate,” Penwarden says.
So what is the outlook for interest rates?
Gavin Opperman, the chief executive of Absa Retail Bank, says the outlook is “for fairly stable rates over the short to medium term”.
The best time to fix your home loan interest rate is when the prime lending rate is at its lowest during a rate cycle, Funeka Ntombela, the head of home loans at Standard Bank, says.
But are we at the bottom of an interest rate cycle?
“Whether or not we are at the bottom of a rate cycle is not an absolute, but what we can say this: the last time prime was nine percent was in February 1974, some 37 years ago; the highest that prime has been is 25.5 percent, which was in August 1998, 13 years ago; and on average the prime lending rate over the past five years is around 12.5 percent, which is 3.5 percentage points greater than prime at the moment.
“So taking all of what we know, coupled with some market views that rates will increase during 2012 at least once, it would be best to apply for a fixed rate now, to ensure that you get as best a rate as you can get, to ensure you fix your monthly repayment and protect your pocket,” Ntombela says.