With the current interest rate at an all-time low, the best they have been in over 50 years, the thought of fixing your interest rate has probably crossed your mind. It is a difficult decision with no right or wrong answers. Your individual financial position will determine the route you should take.
This fabulous interest rate is not the rate at which the bank will fix your interest. The fixed rates quoted by the banks are determined by the size of your loan, the percentage loan to the value of your property and the length of the fixed-rate period (12,18, 24 or 60 months, with some banks fixing rates may go up to 10 years). Fixed rates are often higher than discounted rates, except where banks expect a decrease in repo rates in the near future. Normally, the longer the term of your fixed-rate, the lower the rate. However, the bank will charge the client a penalty fee if the client cancels the loan or changes the interest rate option within the fixed-rate term.
Before considering whether or not to fix your interest rate, first establish the fixed rate you qualify for. Compare this with the current interest rate you are enjoying. Looking at the economic trends over the last 6 months, establish how often the repo rate will have to increase before you start to gain the benefit of fixing your rate. For example, if you are currently enjoying an interest rate of prime less 0.5%, effectively 6.5% and the bank quoted a fixed rate of 8%, the repo rate will have to increase by more than 150 basis points before it becomes beneficial for you to fix your rate.
It is a good idea to monitor the fixed rates offered by a specific bank over a specific period. If the rates are increasing, probably the bank has a fair premonition that the repo rates are on the increase as well. If the fixed rates over a period start to decrease, this is a good indication that the banks envision a decrease in repo rate. Follow this trend!
So who should consider fixing? On a 0.5% interest rate increase, you will pay an additional interest of R41.70 for every R100 000 loan amount. If you are earning a fixed income or are working within a tight budget where an increase in interest rate will negatively impact your financial well-being, then fixing your rate is not an option, but a necessity. If after careful consideration you feel that you stand to gain by fixing your interest rate, then it is a viable option.
The sad truth is that no matter how effective you are in determining the best way forward, there are no guarantees. It is like gambling with a dealer, just that this dealer’s career is built beating the odds. In the 19 years we have been in business, only one client has gained from fixing his interest rates. Are you willing to take the gamble?