Is now a good time to fix my home loan interest rate?

With the South African economy reeling from the aftershocks of President Zuma’s surprise cabinet reshuffle earlier this year, homeowners are understandably concerned about the effect the devaluing rand will have on bond interest rates.

The prime lending rate, which has remained steady at 10.50% since March 2016, may well be poised to begin a significant upward trend should the political situation not stabilise.

Marc Hendricks, Regional Manager for Rawson Finance in the Western Cape, says this could put mortgage holders under serious financial pressure to meet their increasing monthly bond repayments.

In situations like this, Hendricks says it’s not uncommon for homeowners to consider negotiating with their bank to fix their interest rate for a certain length of time. The general hope is that doing so will protect them from future interest rate increases.

Unfortunately, according to Hendricks, fixed interest rates are far from the lifeline they may seem in times like these.

“Because fixed rates do not fluctuate with the prime lending rate, banks are very careful to hedge their bets so that they don’t lose money if prime climbs higher than expected,” says Hendricks.

“That means fixed rates are always higher than variable rates to adequately offset the bank’s increased risk. The greater that risk, the greater the gap between variable and fixed rates are, and the less viable they become as an option for cash-strapped consumers.”

Hendricks says he has recently received quotes from one bank for fixed rates of between 0.59% and 0.84% above the variable rate, depending on the length of the fixed term, which can be 12, 24, 36, 48 or 60 months.

While this may not seem like a big premium for the peace of mind that comes with knowing exactly how much you’ll need to pay into your loan over the coming months, he says adding a little context places things in a different light.

“It’s very important to note that these fixed rates are based on the customer’s current variable rate and not prime,” says Hendricks.

“Don’t be fooled into thinking you’re going to be paying prime plus 0.59%. We’ve had customers being quoted variable rates as high as 5% above prime recently, which makes it entirely possible that those fixed rates could effectively work out to 16% or 17% for them. To fix your rates that high means you’re stuck there for the full fixed rate period - no negotiation - whereas variable rates can be reassessed on request and can be lowered if your risk profile or payment record improves.”

Bond holders with variable rates that are already relatively low might find the fixed rate offer a little more tempting, but Hendricks says he is dubious about their chances of benefiting from a fixed rate as well.

“I wouldn’t be surprised to see banks insisting on reassessing a customer’s variable rate before quoting a fixed rate, which means you may be forced to give up your lower variable rate as part of fixed rate negotiations,” he says.

“That may not be a problem during the fixed rate term - although it does mean your fixed rate will be higher than expected - but when that period concludes, you automatically revert to your reassessed variable rate, which would then be much higher as well.”

The crux of the matter, according to Hendricks, is that banks are never going to make an offer that they believe will leave them short a dollar.

“If a bank is offering a fixed rate of 0.59% higher than what you’re currently paying, they’re either confident that prime won’t rise more than that within your fixed rate period, or they’ve covered their bases by making sure your variable rate is already high enough to provide an adequate buffer,” he says.

Of course, there’s always the chance that the bank has underestimated how high interest rates may rise.

“That’s the gamble. If you know something your bank doesn’t, then fixing your interest rate may be a great idea, but very few of us have the experience or access to information that the banks do when it comes to financial forecasting,” says Hendricks.

“Chances are, anything you’ve thought of, they’ve thought of first, which makes it very difficult to get a jump on them that eats into their profit margin.”

A far wiser course of action, Hendricks says, is to try to improve your credit rating and risk profile and consolidate your debt as far as possible.

“This may make it possible to negotiate a lower variable rate that will save you far more in the long term than any fixed rate could ever do,” says Hendricks.

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