Fixing interest rates is one way of creating a more stable monthly cash flow and can particularly benefit the affordable housing market.
“Fixing rates is ideal for people entering into the market for the first time and for those buying in the affordable housing range, which is up to R600 000,” says Marius Marais, CEO of FNB Housing Finance. “96% of our market comprise of 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.”
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.
“It seems that we now entered an upward rate cycle, however what we can’t tell is how high rates will go and how quickly they will go up,” says Marais.
Fixed rates are generally a few percentage points above the customer’s variable normal bond rate.
“Initially, the customer will pay a higher rate, however this will most likely be offset overtime as rates increase,” says Marais.
On a R500 000 loan, at prime plus 1% (10%), a customer will be paying R4 825. At a fixed rate, assuming 2% above this, he or she will be paying R5 505, which is R680 more. However, 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,” says 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,” says Marais. “Usually, five years see an increase in household salary and the customer is in a better cash flow position then when they were new to the market.”
Fixing your interest rate is fairly simple, in FNB’s case; you can just call into the call centre.
“There are no extra banking fees on a fixed rate option, however exiting the fixed rate period early will generally cost the customer money because the bank has committed to the fixed rate for the full period of time”, says Marais.
Close to the end of the period the bank will contact the customer who will then opt to either re-fix at the then prevailing rate or will revert to a variable interest rate. The variable rate will be as agreed upfront in the mortgage loan agreement.
“We encourage our Housing Finance customers to fix their rates, 40% of our new loans are on a fixed rate basis. We would like to see the whole market moving onto a fixed rate mechanism, which will protect the customer from rate increases in the future,” concludes Marais.