While the current prime interest rate is still considered to be comparatively low, Reserve Bank Governor, Gill Marcus has forewarned the South African public that we are currently in an increasing rate cycle and consumers should expect to see further rate hikes in the future.
Considering this, it is no wonder that many homeowners are contemplating fixing the interest rate on their bonds, says Adrian Goslett, CEO of RE/MAX of Southern Africa.
Who would benefit from a fixed interest rate?
Goslett says that for homeowners who are risk averse or who want to have a fixed bond repayment that they can include into their budget with no surprises, a fixed rate is definitely a viable option to take into consideration.
“It is a particularly good option for homeowners that can’t have any variations in their budget due to fact that they are currently stretched to the limit financially and will not be able to handle any further repayment increases for a fixed period,” adds Goslett, who points out that a home loan rate can generally only be fixed for a maximum period of five years, depending on the financial institution.
According to Goslett, while there are benefits for homeowners who would like to fix their bond rate, there are a few elements that should be considered before they make their decision.
He notes that although a fixed rate will mean that the homeowner’s monthly bond repayment will not increase over the agreed period of time while the rate is fixed, it is important to note that a fixed rate is on average around 2.5% higher than the current prime rate.
“The fixed rate percentage given to a homeowner can vary depending on the terms of the contract and the bank at which the home loan is held, however homeowners can expect to pay a higher rate than the prime rate,” says Goslett.
“While fixing the interest rate will provide some cushion for homeowners if there are successive rate hikes over the term of the contract, if there are no or limited rate hikes, the homeowner will have paid more for their bond than those who have their bonds linked to the prime lending rate.
In order for the homeowner to really see a reasonable benefit of fixing their rate, the prime interest rate would have to increase by at least 3% to 4% during the contract period.”
He adds that when looking at the past history of the interest rate cycle, we can see that the general fluctuation is around the 5% mark over a five year period.
Even though interest rates are expected to increase as inflation continues to place pressure on the Reserve Bank, with the current economic climate there are doubts that we will see an increase as high as 5% over the next five years, however the possibility cannot be ruled out entirely.