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24 February 2014

'Its time to fix your home loan interest rate'

Looks like it's Mortgage Monday, doesn't it???

This is the 3rd mortgage bond related article to start the week and perhaps the most interesting to me.  To fix or not to fix?  If so, when?

At historically low interest rates and all the appearances of entering an upward cycle, perhaps now is the time.  However, you must bear in mind that you will not be able to fix it at the same as the variable rate you will get.  You will typically fix it a couple of percentage points higher.  This means that the interest rate will have to rise by more than 2% (200 basis points in "banker speak") before you derive any financial benefit.  However, you must decide if the peace of mind of knowing exactly how much you will be paying over the next 12 - 60 months or so.

Gareth Shepperson
Commercial and Property Attorney

'Its time to fix your home loan interest rate'

If you recently obtained a home loan for the first time and are in the 'affordable housing' range of up R600 000, you should consider fixing your interest rate. This is the advice of Marius Marais, chief executive of housing finance at First National Bank (FNB).

'Fixing interest rates is one way of creating a more stable monthly cash flow and is ideal for people entering the market for the first time and for those buying in the 'affordable housing' range, which is up to R600 000,' he says.

First-time homeowners constitute 96 percent of the home loan market. 'Due to affordability issues, these customers generally gear their loan to the maximum in order to purchase an entry-level house, which makes them the most vulnerable to changes in the interest rate,' Marais says.

Until last month, when the Reserve Bank hiked its lending rate by 50 basis points to 5.5 percent, the prime rate of 8.5 percent was at its lowest in 20 years. The highest it has been is 25.5 percent, which was in 1996.

'It seems that we have entered an upward rate cycle. What we can't tell is how high rates will go or how quickly they will go up,' Marais says.

Fixed rates are generally a few percentage points above the customer's variable rate.

'Initially, the customer will pay a higher rate. However, this will most likely be offset over time as rates increase,' Marais says.

On a R500 000 loan, at prime plus one percent (10 percent), your instalment is R4 825. At a fixed rate, assuming two percent above this, the instalment is R5 505, which is R680 more. However, as the interest rate goes up, this gap will close by R335 for every percentage point increase, Marais says.

When you fix, there is the risk of the interest rate not moving higher than two percentage points, he says.

There are no extra fees if you fix your rate, but if you want to exit the fixed rate period early, it will cost you, because the bank has committed to the fixed rate for the full period, Marais says.

Close to the end of the fixed rate period the bank will contact you and offer you the option to either re-fix at the prevailing rate or move to a variable interest rate.

'Forty percent of our new loans are on a fixed-rate basis. We would like to see the whole market moving to a fixed-rate mechanism, which will protect the customer from rate increases in the future,' Marais says.

Personal Finance


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