According to the chairperson of the Seeff Property Group, Samuel Seeff, the decision to fix one’s interest rate depends on the individual.
“In my 38 years in the industry, interest rates have averaged around 12%. Thus, even returning to the 10% level before the onset of the Covid-19 pandemic, it is still well below the average at 8.5%.”
“Floating interest rate is generally the standard when it comes to interest rates. A floating rate is directly linked to the prime or base home loan rate and adjusts as the repo rate (repurchase rate) is adjusted by the South African Reserve Bank. These adjustments are made in increments referred to as basis points. For example, the last rate hike was 50 basis points which equate to half a per cent.
“When there is an adjustment in the rate, whether up or down, the interest rate on your home loan (and other credit and loans) will adjust accordingly,” said Seeff.
Fixed interest rate
Seeff pointed out that a fixed interest rate is a flat rate set for a period. This means that if there is an adjustment to the interest rate, the rate on your home loan will not adjust.
“It, however, means that should the interest rate drop, you would not benefit from the savings on the lower rate, but you also do not have to pay more should the rate increase.
“The drawback is that a fixed rate is usually set at a few percentage points above the prevailing rate, usually upwards of two per cent. In South Africa, it can generally only be fixed for three to five years compared to overseas where you could fix it for up to 10 to 30 years.
“While it allows you to plan for certainty, it is only for a short period and the rate might not reach the amount of your fixed rate which means you are not benefiting if the rate drops,” said Seeff.
Comprising interest rates
Seeff highlighted that investing a deposit upfront is a great way to ensure you have a financial buffer.
“It will reduce the amount that you need to borrow and allow you to accumulate capital value faster.
“You should also aim to put spare money into your home loan to reduce the repayment period and the interest you will be paying in the long term. Keeping the repayment steady when the rate drops is one way to build up equity and the sooner you can pay off your home, the higher the capital value and equity you can accumulate,” said Seeff.
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