The pros and cons of fixing your mortgage rate

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Do your homework because you could end up paying more.

JOHANNESBURG - The surprise move by the Reserve Bank to reduce the repo rate by 50 basis points has prompted some homeowners to ponder fixing their mortgage rates. The cut has brought interest rates to its lowest levels in almost 40 years.

Absa home loans analyst, Jacques du Toit, has advised consumers to do their homework before fixing their home loans to ensure they don’t end up paying more than the variable rate.

Chris Hart, chief economist of Investment Solutions, says it’s premature to fix your rate now and predicts a further two interest rate cuts in the near future. “We have strong deflationary forces when it comes to debt. This is being counteracted by inflationary forces so we are in a position where rates are still going to come down.” Hart says homeowners should consider the fixing option once the rate declines to 4% on the repo rate.

Hart has also cautioned homeowners to factor in the premium they will have to pay to fix their home loans, making it too expensive. An example is: “If you can get prime minus three, you lose that and it becomes prime plus to actually fix the rate.”

Hart added that property had not taken off despite the record low interest rates so far but with inflation rising more than property prices for the last five years now bargains could be picked up. “If this (the low interest rate) does ignite the property market, you will have walked in at the right time,” Hart said.

FNB home loans head of sales, Ewald Kellerman, says homeowners considering fixing their home loans should not wait until the Reserve Bank begins to raise its repo rate because by then the fixed interest rates on offer will have normally become less attractive, often pricing in a series of expected interest rate hikes.

Du Toit says the best time to fix rates is when they are in a downward cycle and not when they are near or at a bottom as fixed rates will then reflect expectations of further rate cuts. This means that the fixed rate might then be above or more expensive than the variable one.

Du Toit adds that in the current climate consumers are unlikely to secure a fixed rate that differs much from the variable and that it might even be slightly higher.

Ooba’s executive director of sales and distribution, Craig Deats, points out that a decision on whether or not to fix your home loan rate depends on your personal financial health.

“The advantage to borrowers of a fixed home loan rate is that it provides peace of mind, knowing that they can budget with a degree of security that any rate increases over the contract period will not affect their ability to meet their debt obligation,” Deats said.

Households on very tight budgets with little potential income growth would benefit from fixing their home loan rate.

Deats added: “The disadvantage of a fixed home loan rate is that fixed rates on offer from banks are generally above the prime lending rate and become even less attractive when banks start anticipating increases in the repo rate."

Absa has outlined the advantages and disadvantages of a fixed as opposed to variable interest rate as follows:

Fixed mortgage rate

• Advantages: A fixed mortgage rate will not increase when other interest rates rise. This gives peace of mind with regard to future mortgage repayments. It allows the client to plan and budget more accurately and facilitates future cash-flow management. Clients may revert to the variable rate after the fixed-rate contract has expired, or may decide on a new fixed-rate contract, depending on their personal financial circumstances and views of the future interest rate cycle.
• Disadvantages: A fixed mortgage rate may well be above the variable rate for the full term of the fixed-rate contract. The gap between fixed and variables rates may widen if variable rates fall during the term of a fixedrate contract. Clients are locked in for the full term of a fixed-rate contract.

Variable mortgage rate

• Advantages: Clients get the immediate and full benefit of a cut in interest rates, while they may at any time switch to a fixed-rate contract in an attempt to hedge interest rate risk. Under certain conditions and terms, clients may gain a rate concession (negotiate a mortgage rate lower than the prevailing variable rate, depending on certain terms and conditions).
• Disadvantages: Clients feel the immediate and full impact of any increase in interest rates. Sharp increases in interest rates may affect clients’ ability to repay mortgage loans to such an extent that the financial institution has no other option but to repossess the properties concerned because instalments are not being paid. However, this is normally the last option, as such actions benefit neither the client nor the financial institution. The various options currently available with regard to fixed and variable mortgage rates have increased the flexibility of managing the repayments on a mortgage loan to a large extent. Clients can take market conditions and interest rate expectations into account in their choice of a mortgage rate.