Should I fix the interest rate on my home loan?

With interest rates being at a 50-year low, many South Africans might be contemplating whether now is the time to fix the interest rate on their home loan. Before going ahead with this decision, Adrian Goslett, Regional Director and CEO of REMAX of Southern Africa, strongly recommends that buyers carefully consider the various implications of this decision to ensure that they do not later come to regret it.

“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,” Goslett advises.

Another service that could advise homeowners in this respect is a bond origination service such as BetterBond. According to BetterBond CEO, Carl Coetzee, 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,” Coetzee explains.

When going 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.

That being said, 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, which helps for 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. 

If past experiences are anything to go by, 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. Coetzee cautions, however, 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,” he advises.

Whatever you decide to do, Goslett recommends doing your research and speaking to an expert before going ahead with any decision. “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. Bond origination services such as BetterBond offer this service for free, which makes this process much easier for you. If you’re unsure what to do next, schedule an appointment with BetterBond to gather quotes and review your options,” Goslett concludes.

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