Is fixing your home loan interest rate ideal?

12 July 2017: Following the South African Reserve Bank’s move to keep interest rates at the same level, coupled with the notion that the bank may have reached the peak of its hiking cycle; home owners will probably be reluctant to fix their home loan interest rates.

“Although there’s a good chance that interest rates may have peaked; consumers still need to tread with caution due to possible risks of further downgrades to our sovereign credit ratings. Therefore, home owners may find current fixed interest rates on offer quite generous and it could provide some good protection to borrowers who want peace of mind knowing that their Home Loans repayments will remain unchanged for a period of up to five years into the future,” says Tommy Nel, Head of Credit at FNB Home Loans.

On the other hand, consumers currently feeling the pinch shouldn’t view fixing interest rates as a way of saving money, but rather as a personal cashflow management option.

“When taking up fixed rates it is important not to try and time or beat the market. It should be more of a risk based decision to try and protect your home as one of the most important assets you may own,” advises Nel.

Consumers must also be aware that fixing interest rates could result in them missing out on savings if the Reserve Bank decides to embark on an interest rate reduction cycle.

“However, you shouldn’t beat yourself up about getting such a call wrong if it serves to mitigate the risk of not being able to pay your bond if rates increased,” says Nel. 

Fixing rates may also be ideal for individuals who own multiple properties and use the stable rates as a strategy to cushion against future hikes, which would severely impact their cash flow.

Given economic uncertainty and unpredictable interest rates, Nel advises consumers who aren’t sure whether to fix rates or not, to rather try and get a favourable interest rate from their bank when applying for a home loan: 

  • Reducing the banks’ risk – lenders often take a risk based approach when assessing a home loan application by weighing how much they would lose in the event that a property is foreclosed.

Therefore, paying a higher deposit reduces the loan to value ratio (LTV), allowing the bank to offer you a more favourable interest rate, as their risk exposure is reduced.

  • Good credit record – “you may have heard this over a thousand times, but the impact shouldn’t be underestimated,” says Nel.

Optimally managing your financial affairs and making repayments to creditors on time will give you a better credit score and home loan interest rate.

  • Loan term – opting for a 30 year home loan may result in you paying a lower monthly instalment, but you are also likely to pay 64% more in interest compared to a 20 year term, and may also attract a higher home loan interest rate.
  • Extra monthly payments – paying a bit extra on your home loan every month will not reduce the interest rate, but will help you reduce the principle debt that the interest is calculated on. 

This would allow you to substantially save on interest payable and reduce the term of your loan considerably.  For example, paying R1 000 extra every month on a R500 000 home loan for 20 years at an interest rate of 10.5%, could save you R296 000 in interest payments and reduce your repayment term to 13 years.

“Depending on your individual circumstances, the decision to fix your home loan interest rate should be carefully considered and thoroughly researched to avoid making costly mistakes,” concludes Nel.

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