With interest rates at a fifty-year low, many homeowners may be contemplating fixing the interest rates on their home loans. Regional Director and CEO of REMAX Southern Africa, Adrian Goslett, strongly recommends that you carefully consider the various implications of this decision to ensure that you do not regret your decision down the line.
“The truth is that there are so many unknown variables around interest rate fluctuations that it is impossible to tell with absolute certainty whether fixing your interest rate now will be more beneficial for you in the long run than if you had kept your home loan subject to interest rate changes on a variable interest rate. I would advise those considering fixing their interest rate to meet with a financial advisor to make sure this is the best decision for them” he says.
According to bond originators, BetterBond, when you apply for a home loan, it is by default on the basis of a variable interest rate: “Only once your bond has registered, can you apply for a fixed interest rate and then there is a strict time limit attached before the offer lapses. As a general rule, a fixed interest rate is higher than a variable one because it poses more of a risk for the bank. A fixed interest rate is usually set for a period of up to 5 years, after which you will have to renegotiate it,” explains BetterBond CEO, Carl Coetzee.
If you decide to go ahead with this option, one of the main factors to consider is that those who choose to fix their interest rate, will not benefit from any further cuts in interest rates for the duration of their fixed term. Banks only offer a fixed rate for a maximum of five years.
“Given our current economic outlook, it is possible that interest rates will lower even further. Anyone who fixes their interest rate will lose out on these savings,” Goslett highlights.
Those who choose to fix their interest rates will have the peace of mind of knowing that their monthly instalment will not change for the next few years. This helps with budgeting purposes:
“If this is the reason for wanting to fix your interest rates, I would advise rather leaving room in your budget when applying for home finance. You will have far more flexibility and will stand to save more if you choose not to fix your interest rate but rather to have room in your budget to pay an extra 1 – 2% on your repayments should interest rates increase during your lending term,” he recommends.
Most historical sources seem to agree that you are probably likely to pay a little less with a variable interest rate than on a fixed interest rate over time. However, Carl cautions that: “This is useful to consider, but it’s even more important to remember that past trends aren’t necessarily good indicators of future performance. The determining factor must always be affordability, so look carefully at your financial situation, to see what you can afford and take into account your financial commitments”.
Whichever option you decide on, Goslett recommends that you do your research and you speak to an expert before going ahead: “This is a choice that can end up saving or costing you hundreds of thousands of Rands in interest charges, so it should not be undertaken lightly. Shop around to make sure you’re getting the best possible rate on your home finance.”.