Is it time to fix your home loan interest rate?

Is it time to fix your home loan interest rate now that interest rates are expected to keep climbing? With the low interest rates over the past two years, more consumers have bought their own homes and might find that increased monthly instalments could be too much to afford.

A fixed or variable interest rate allows you to budget with a clear indication of what your loan instalment will be for a set period, regardless of fluctuations in the prime lending rate. The Monetary Policy Committee (MPC) of the Reserve Bank (Sarb) sets the repo rate every two months to influence the level of inflation.

“Since the onset of the Covid-19 pandemic a lower interest rate environment has improved home loan affordability for most consumers, while it also stimulated the demand for housing, paved the way for new customers to enter the market and empowered owners to undertake alterations before selling to upgrade,” says Geoffrey Lee, managing executive for secured lending at Absa.

ALSO READ: Covid cuts in the repo rate mean R1m in home loan debt now costs R1,747 less monthly

Opting for a fixed interest rate?

Should these consumers therefore opt for a fixed interest rate? “While customers will want to preserve the affordability of their loan repayments, there is no one-size-fits-all approach to adequately cater for their unique financial circumstances,” he says.

Fixed interest rates, where the prime lending rate influences instalments, are the default option on all Absa home loans and Lee says customers can apply for a fixed rate once their bond accounts are registered for pre-determined periods from 12 to 60 months.

He says customers can set interest rates for 12, 24, 36, 48 or 60 months after the bank performed a credit assessment and the customer agrees to the pricing for the fixed rate and term. Absa does not charge extra fees, but consumers must remember that the longer the fixed rate term, the more expensive it will be.

If you cancel the agreement before the end of the fixed rate term, the bank will charge an early settlement fee.

However, Lee says, you should investigate both options in the context of your personal needs. The best idea is to discuss the various options to make your home loan more affordable with the home loan consultants at the bank, such as paying a deposit that could lower repayments and ensure a more favourable interest rate from the start.

ALSO READ: Repo rate hike ‘not good for consumers or economy’

Consider a fixed interest rate but beware

Prof. Jannie Rossouw, visiting professor at the Wits Business School, says it does seem to be a good time to consider a fixed interest rate, but consumers must be very careful when they choose to fix their interest rate and first have a look to see if the bank has not already included possible interest rate increases into the offer of a fixed rate.

You can do this by comparing the rate offered with what was offered a few months ago.

Hugo Pienaar, economist at the Bureau for Economic Research at Stellenbosch University, agrees that the decision to fix the interest on a home loan will very much depend on your individual circumstances and therefore the best idea is to discuss it with a financial advisor.

He points out that because the prime rate is starting to increase from such a low level, even with a 25 basis points increase in each quarter of 2022, the rate will remain significantly lower than the pre-pandemic level.

You should look at what the fixed rate is that your bank is offering and for how long you will be locked into this rate. If it is more than the general expectation about how high the prime interest rate will go over say a three-year period, it is not worth it to fix the mortgage, Pienaar says.

“Also, the fixed rate kicks in immediately at the higher rate, whereas the prime rate may take some time to reach the fixed level, implying that consumers will potentially pay more for some time than they would have by just sticking with a floating mortgage rate.”

Pienaar says therefore, unless you really think that the prime rate will increase dramatically and stay at that higher level for a prolonged period, it is probably not worth it to fix the rate.

ALSO READ: Inflation and repo rate roller coaster ride expected this year

If you are in financial distress

Consumers who are in financial distress should contact their banks immediately when their circumstances change, such as being retrenched.

“The bank will do everything possible to work with customers in financial distress to address the situation. If we are unable to resolve the situation with a credit solution, we have a dedicated team to assist the customers to sell their properties to move to a more affordable home.”

Please note that this article does not offer financial advice, as this can only be done by a registered financial adviser.