The SA Reserve Bank’s recent series of increasing interest rates has caused many homeowners to consider whether or not they should apply to fix the interest rates on their home loans.
Although a variable rate on a mortgage bond means you have to be flexible with your monthly budget, it is generally considered a better choice than a fixed rate option. The advantage of a fixed interest rate is that you can plan least one of the items of expenditure in your household budget with some certainty without unpleasant surprises along the way. This is especially helpful in the early years of a loan when most new homeowners are strapped for cash.
However, each situation is different, and your decision will depend on your personal circumstances and expected needs - now and in the future.
Disadvantages
The banks have to assess the possibility and risks of future interest rates. If interest rates are expected to rise, the banks will only offer to fix the rate after taking into account their expectations of future interest rates.
A fixed interest rate may be less risky for you, but it’s greater risk for the bank, so they’re likely to charge you a higher rate than if you opted for a variable-rate loan. Depending on your credit rating, this can be as much as two to three percent more.
Keep in mind that fixed interest rates expire after the initial agreed period. At this point, you will either have to revert to variable interest rates or negotiate a new fixed rate, which could be higher than your present rate.
Alternatives
There are other steps you can take to minimise the payment of interest on your home loan.
- Always put down the biggest possible deposit when buying a property. This will help you secure a lower interest rate, and monthly repayments will be lower.
- If possible, make sure you repay more than the minimum required each month. For example, R500 extra a month on a R1 million bond could reduce the overall amount you will pay by over R200 000 and the repayment period to 17 years instead of the usual 20 years.
- Try to make additional payments whenever extra funds are available, for example, a bonus or a tax refund. You may be tempted to spend your windfall on a holiday, but putting it into your bond will benefit you far more in the long term.
Regardless of whether or not you decide to fix your interest rate, it’s good practice to maintain regular contact with your bank manager over the term of the loan and keep an eye on the interest rate being charged. Once you have established a good credit record and payment history, you may be able to negotiate a reduction in the interest rate on the loan.
Writer : Sarah-Jane Meyer