How to make a decision about fixing your interest rate

Like most home owners, you probably breathed a huge sigh of relief when you heard the announcement from the Monetary Policy Committee that the prime interest rate would remain unchanged. If you are one of the many people who have had to tighten their belts as their home loan repayments increased over the last year, fixing your interest rate at the bank may sound like a good idea.

Kay Geldenhuys, manager of property finance processing at ooba, highlights these points to help you make the decision:

1.     A small change in the interest rate can mean big additional costs for you

If you are paying off a R1 million house over 20 years at a 10.5% interest rate, you will pay R9 983.80 per month, and a total payment of R2 396 111.73 over the lifetime of your loan. If the interest rate increases by just 0.25 points to 10.75%, your monthly repayments will be R10 152.29, and you will pay back R2 436 549.49 over the 20-year term.

“That’s a difference of R40 437.76 – a significant amount of money from such a small shift,” says Geldenhuys. “It’s worth thinking about what you can do to protect yourself against these changes.”

2.     It costs you money to fix your interest rate

“Banks hedge their own risk of the interest rate going up by only allowing you to fix your rate at a rate higher than the one you are currently paying,”  explains Geldenhuys.

So if you are paying your bond repayments at an interest rate of 10.5%, your bank might only allow you to fix that rate at 11% or even 11.5%. This means that you will already be subject to some of the potential future increases you are trying to protect yourself against.

3.     You won’t be able to fix your interest rate forever

Most banks limit the fixing of the interest rate to a specific term. This means that you can protect yourself against fluctuations in the short term – usually between one to five years – but at the end of that term, you will have to renegotiate your rate.

“This means that you might lose out on incremental growth and adjustment over time, and have to pay significantly more each month at the end of the term,” says Geldenhuys. “But you can guard against this by watching the interest rate fluctuations so that you are aware of what might happen.”

4.     Fixing your interest rate allows you to plan your finances

The one benefit that fixing your interest rate does guarantee is that it allows you to plan your finances around a fixed cost. “With so many other costs spiralling out of control, it can be reassuring to know that one of your biggest expenses isn’t going to change,” says Geldenhuys.

To fix or not to fix?

While many analysts will offer their opinion on whether the interest rate is likely to increase, remain unchanged or decrease, nobody can really tell. The Monetary Policy Committee has to weigh up a variety of factors when addressing this issue, and many of these factors change between each announcement.

Because it’s impossible to predict the interest rate’s future behaviour, the decision to fix your home loan rate must be made for personal reasons. Simply put, is it better to pay a little extra to be able to plan around a specific rate for a one to five year term, or is it better to continue to ride the fluctuations?

“Deciding what to do can be tricky. But, whatever you do, make sure that you make a decision that is in line with your personal goals. Did you buy the property as an investment over the long-term, or are you looking to sell in the short-term? The answers to these questions will help you decide on whether you should indeed fix your interest rate,” concludes Geldenhuys.

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