Some homeowners are currently considering to fix what is not broken - their variable mortgage interest rates. When pondering the question to fix or not to fix, a mortgagee must be sure to get ALL the relevant information first.
What advantages do a fixed interest rate have for the average homeowner?
Fixing your home loan rate takes away the short to medium term risk of a interest rate hike. A fixed rate provides certainty for people who cannot afford a sudden jump in their monthly repayments, due to a hike in a variable interest rate. For homeowners who very recently took a home loan with monthly repayments that fall just within their budgets, a fixed rate offers some piece of mind.
Most banks will allow existing bondholders to switch from a variable interest rate to a fixed mortgage rate.
What disadvantages might a fixed mortgage rate have?
Fixing your home loan rate does have some downsides.
The obvious disadvantage to a homeowner comes when interest rates fall below the levels at which his/her interest rate was fixed. If this happens, the homeowner with a fixed rate will pay more for his/her house than people who did not go for the fix.
Lenders may require martgagees to pay a premium of a few percentage points for fixing their mortgage interest rates. This means that the fixed interest rate will most probably not be the lowest interest rate available.
In South Africa, lenders typically only offer fixed interest rates for relatively short periods of time. You will, for example, only be able to fix your home loan interest rate for a year or two at a time, but not for the duration of your mortgage term.
Homeowners should also be aware that some banks penalise mortgagees if they sell their properties, or settle their bonds, while are under a fixed interest rate contract.
Predicting the future
Before a homeowner can decide whether to fix the mortgage interest rate or not, he/she needs to have a good idea of what is likely to happen to interest rates in the near future.
If interest rates are widely forecast to rise, a fixed rate might be the better option. But if interest rates are expected to fall, homeowners would be well advised not to lock into a fixed mortgage interest rate. If interest rates are predicted to drop slowly, homeowners could still benefit from fixing their home loan interest rates for a short period of time. The certainty and stability offered by a fixed interest rate on your mortgage might be worth paying a little bit more for a while.
The problem with deciding to fix or not, is the fact that the future is a very hard thing to predict. Interest rate prophets, whether highly informed or not, are very often proven wrong.
Aspects that affect interest rates
South African mortgage interest rates are usually based on the South African Reserve Bank's official interest rate, called the repo rate. Banks can borrow money from the Reserve Bank and will be charged interest according to the official interest rate. They then lend money to their clients at an interest rate that is a few percentage points higher than the interest rate they have to pay. (The banks have to make some profit, after all.)
The repo rate is determined by the Reserve Bank's monetary policy, which is currently inflation targeted. The inflation rate for a certain period of time will therefore influence the Reserve Bank's decision to raise or lower the repo rate, and therefore raise or lower your mortgage interest rate. The South African Reserve Bank especially look at the consumer price index for metropolitan and other urban areas excluding mortgage interest costs (the CPIX) to come to a decision about the repo rate adjustment.
But a whole lot of different aspects can have an influence on the repo rate, including the value of the Rand, national debt, consumer debt, the oil price, the Reserve Bank's future expectations and what not!
Deciding to fix mortgage interest rates
Whether you fix your interest rate or not will depend on how comfortable you are with taking risks. A more conservative homeowner, with a low affinity for risk, is more likely to opt for a fixed home loan interest rate than someone who are prepared to accept the risk of increases in the interest rate with an eye on taking advantage of lower interest rates through a variable rate mortgage.
You can listen to the experts and various banking institution spokespersons' predictions and advice, but ultimately, it is your decision. Be warned: economists have been wrong many times before, so don't act solely on someone else's predictions of interest rates in the future. You will have to live with the consequences of fixing your interest rate or letting it fluctuate. So, get as informed as possible before making your decision (And please just don't make a gut decision that may prove costly.)
Fixing your home loan rate boils down to whether you are feeling negative or optimistic about the financial prospects in South Africa and the rest of the world. Do you feel that South Africa's financial problems are being neatly dealt with, or do you feel that we are heading for economic turmoil?
You do have the option to fix your mortgage bond rate, so when the time comes where you need it, fix that interest rate!
