In today’s economy, is it a good idea to fix your home loan rate?
While the question might be a straightforward one, the answer is a tad more complex. There are, as you may or may not know, a number of pros and cons to fixing an interest rate.
It’s no secret that after SARB’s (South African Reserve Bank) decision to retain the interest rates at the same level alongside another idea of the bank potentially having reached the peak of its hiking cycle has frightened homeowners somewhat. Rumour has it that they’re a tad reluctant to fix the interest rate on their current home loans.
Just because interest rates have reached their peak, it doesn’t negate the fact that consumers countrywide have to exercise a level of caution. The phrase “junk status” has not officially left the building, it’s still loitering around in the lobby. There are, therefore, risks that our credit rating could downgrade even further than it already has.
South Africa's prime lending rate
The Bank Lending Rate in South Africa has remained unchanged at 10 percent in July from beginning July of 2018.
This little fact has homeowners gleaming at the current fixed rate on offer. Not only is it a very generous offer, but it also boasts excellent protection for the borrowers who are after the peace of mind and comfort in knowing that their repayments won’t escalate and will remain unchanged. That’s a pretty good victory for consumers who are currently living in a recession.
An interest rate change on a home loan can hugely benefit or drastically impact the total repayment in the end. A change of as little as 0.25 points on an R1 million property can make a difference of R40,000 over a 20-year period. That’s pretty significant.
A saving of R40,000 would be great, but how would you feel about losing the same amount? It’s all a preference at the end of the day, but homeowners tend to stick with the safest option which is a fixed interest rate loan.
Choosing the fixed interest rate
Going the fixed-rate route is great, but remember that you shouldn’t try to time or beat the current market. It should be a decision based on the risk that essentially looks out for your home and your family and the end of the day.
The downside of fixed interest rates
Well, unfortunately, there will always be at the very least, one downside. That one negative is that any consumer that chooses to have an unchanged rate will lose out on any chance at enjoying the reward of savings on the bond, should the Reserve Bank surprise us all with a reduction on the interest rates.
However, it is true that banks have their own risk to consider and deal with should the interest rate rise, since they’re allowing the consumer to fix their repayments, even though they have higher rates to pay than before.
There is, sadly, no way to accurately forecast how an interest rate will play out in future, whether it be an immediate or long term forecast. Sure, there will be projections, but your home loan term is over a substantially long period and your decision should really be in line with personal goals.
A little advice on home loans
Due to our ongoing economic uncertainty in this country, it’s no surprise that consumers still feel unsure about how to proceed when choosing whether to fix their home loan rate or not. A bit of advice from some of the professionals in this game is to try and seek out a favourable interest rate from your own bank when you are ready to apply for a loan.
Wouldn’t the smartest move when you’re about to enter into a risk agreement be to physically calculate the value of the risk in the event that the risk becomes a reality? I would think so, and that is why it’s precisely what the banks do. They will use an approach that allows them to assess a home loan application in a way that truly measures what they would lose due to a property being foreclosed.
Offer a deposit to reduce interest
When you consider that, paying a weightier deposit on your home loan reduces the loan to value ratio. Banks are then in a position to offer you a better interest rate because their risk has decreased.
Make extra payments on your home loan
We all know how to spare a little extra each month if we try hard enough and the thing is that it makes such a difference on your home loan if you can feed it into that account. It won’t reduce the interest rate, but it will assist in bringing down the principal debt that the interest is calculated on and perhaps allow you to pay off your debt sooner.
The way it works is that you will be saving on the interest payable since it’s calculated on the amount of principal debt owing. Thus, reducing your loan term as a whole! The savings end up being a couple hundred thousand if you commit to that additional payment each and every month, so cancel your wine-of-the-month club or any of those other subscriptions that just collect dust and no longer offer any rewards and use the cash to pay off your home loan quicker!