There is now much greater pressure on the SA Reserve Bank to increase interest rates, with the longest period of decline in the rand in history bringing the question of fixing interest rates on home loans into sharp focus, says Laurence van Blerck, Knight Frank Residential SA agent.
When a purchaser applies for a home loan, they should always shop around, preferably through an experienced bond originator, to secure the best deal possible. The best deal does not necessarily mean the highest loan amount (bearing in mind the long term nature of a home loan, which will probably be 20 years) but rather to obtain the best possible interest rate at the outset. A fixed interest rate means that at least one of the items of expenditure in your household budget can be planned with some certainty with no unpleasant surprises along the way, but it does require careful consideration, said van Blerck.
The best time to fix interest rates on a home loan is when interest rates are low, but, human nature being what it is, most borrowers only think about fixing the rate when interest rates are rising, he said. It is unlikely that the average homeowner can “beat the market” and inevitably there is a cost to the home owner when fixing the rate.
There is a premium for raising funds over a long period of time. The banks have to take a view on future interest rates. So, in a market where interest rates are expected to rise, the banks will only offer to fix the rate after taking into account their expectations of future interest rates and will not fix at the current interest rate. The fixed interest rate home loan will, therefore, at some stage during the period of the loan, be higher than a variable rate mortgage.
Banks will only fix the rate for a maximum term of five years due to the risks they have to manage. Once the fixed rate contract expires, the home loan automatically reverts to the prevailing variable rate unless the homeowner has applied for a new fixed rate loan. Although a variable rate on a mortgage bond means that the buyer has to be flexible with their monthly budget, it is generally considered to be a better choice than a fixed rate option.
There are other steps the homeowner can take to minimise the payment of interest:
· Where possible, always go for the biggest deposit when purchasing a home. It will help to secure a lower interest rate. In addition, monthly repayments will be lower, enabling a quicker repayment of the loan.
· If possible, make sure that the monthly repayments on the bond are above the minimum required. An amount of R500 extra per month, for example, on a R1 million bond initially taken over 20 years at an interest rate of 9.75%, could reduce the overall amount by as much as R202 800 and the repayment period to 17 years.
· Try to make extra repayments whenever there is extra cash available, such as a bonus or tax refund. “Even though you may feel that you are missing out now, it will benefit you in the long term,” said van Blerck.
· It is advisable for buyers to keep in touch with their bank manager and a watchful eye on the interest rate being charged. Once a good credit record is established, a reduction in the interest rate being charged could possibly be negotiated.
“Do some scenario planning when making a decision on your home loan. Ask your adviser to prepare a schedule recording the effect of 1% increases in the interest rate on your monthly repayments so that you are fully aware of the effect on your household budget. You can then determine your breakeven point and decide whether you want to fix your interest rate. After all, you don’t want to risk losing your property,” he said.