HOME LOAN TIPS: To fix or not to fix
Following the recent prime interest rate hike of 0.5% announced by the reserve bank, the question of whether to fix your homeloan interest rate is again being debated.
Industry experts seem divided on whether fixing your rate at this point would be the wiser option.
Although an increase of 0.5% would not have created many problems for most homeowners, economists fear that if interest rates are increased further many homeowners would begin to struggle to meet their montly mortgage repayments.
Absa Home Loans senior economist Jacques du Toit believes that “if current inflationary pressures, and other negative factors, persist in the second half of the year, it is quite possible that interest rates may increase further before the end of the year”.
The decision of whether to fix your home loan interest rate depends on how you perceive interest rates to progress. Generally, it would be better to fix your mortgage rate if you expect rates to increase over the term of your bond.
Another valid reason to fix your rate is if you are currently comfortable with your monthly bond repayments. You will then be protected from any rate hikes, although if rates drop you will not benefit from the lower rate.
Fixing the interest rate paid comes at a price. The initial interest rate is higher than the current variable rate but once rates begin to rise, the client scores as his rate stays fixed. Interest rates can be fixed for different periods, usually between one and five years, depending on the bank. The fixed rate option is usually only cost effective if it is taken for a year or more. After the time period has lapsed, the customer goes back to a variable interest rate.
However, should a customer decide to switch back to variable before the time period is up, there is usually a fixed cost involved which is multiplied by the number of months remaining.