It may be wise to fix your bond rate now; then again, it may not be

It may be wise to fix your bond rate now; then again, it may not be

With interest rates predicted to possibly reach 10% in six months' time, many flustered home owners are scrambling to find out if they should be fixing their bond rates now.

FNB economists believe the repo rate will increase by 1.5% between now and the end of November, and then by another 0.25% in January 2023.

If this materializes, the repo rate will be 6.5%, taking the prime lending rate to 10%. Currently the interest rate is 8.25%.

The question many home owners are asking is whether they should be rushing to fix their interest rates now.

If the interest rate does increase to 10% in 2023, Careen Mckinon and Kay Geldenhuys of ooba Home Loans says this would take the rate to the same level it was in 2020, prior to the Covid lockdown.

As with any financial decision, there are benefits and there are risks to fixing your rates, they say in a joint response.

"Households on very tight budgets with little potential income growth could benefit in the long term from fixing their home loan rate. And, if you are entering into the market for the first time, the fixing of your rate could be a sensible option as it will provide you with protection from rate increases in the future.

"However, banks have to hedge their own risks in allowing you to fix your rate, so when they allow you to fix your rate, it will be at a rate higher than the rate that you are currently paying.

" Mckinon and Geldenhuys explain that you can only fix your interest rate once your bond has already been registered, and that your repayment history must be clean. Banks usually allow a rate to be fixed for a period of one to five years.

"Fixed rates are more expensive compared to variable rates, therefore if you are currently enjoying a rate of, let's say, prime minus 1%, your rate might be fixed at prime or even prime plus. Your bank will quote you a fixed rate which will be determined by the period that you want to fix your rate for and the bank's fixed rate pricing policy. Some banks will also take a view of your risk profile when quoting a fixed rate.

"Once your fixed rate term has expired, you have the option to renegotiate another fixed rate term or go back to a variable rate. However, there is no guarantee that you will be offered the variable interest rate that you originally had when you go back to a variable rate."

The trick to interest rate fixing, therefore, is taking the long view, they say.

"If you believe that that the interest rate will continue to go up, then it's worth taking the short-term increase for the longer term benefits. Right now we are in an upward interest rate cycle, therefore borrowers should conduct a sensitivity analysis on what interest rate increase they are able to absorb."

To sum it up, Mckinon and Geldenhuys say: "If it will give you peace of mind to be able to budget your repayments at a fixed rate into the future, then it's a good time to fix. On the other hand, if you would like to continue to benefit from the current low rate for as long as possible, and believe that the interest rate might come down in the longer term, then it's best to wait it out, particularly if you are enjoying a very attractive variable rate below the current prime lending rate."

If the interest rate does return to 10% by January, Samuel Seeff, chairman of the Seeff Property Group, says this will still be lower than the average of 12% to 16% over the past 38 years. And so the decision as to whether to fix your rate or not is personal.

"You will need to consider whether you view it as an opportunity to create the security of a fixed payment, but bear in mind that this will be at a higher rate than the prevailing rate and is likely to only be fixed for a period of two to five years at best.

"It will only be a short-term measure and for that period you also would not benefit from any rate decreases, and it is possible that the rate may not increase above the fixed rate."

Carl Coetzee, chief executive of BetterBond, says there is no simple answer when it comes to evaluating the benefits of a fixed or variable interest rate as each buyer's financial situation and circumstances are unique. When you apply for a home loan, it is by default with a variable interest rate.

"You can apply for a fixed interest rate only once your bond has registered and there is a strict time limit before the offer lapses."

Other important factors to bear in mind is that the interest rate you will be offered depends on your credit profile and affordability.

"Fixed interest rates are set for up to five years maximum, which means that over a 20-year loan you would need to renegotiate the terms. This also means that the terms could be less favourable than when you first fixed your rate.

"While it can be reassuring having a fixed rate so that you know what your instalment will be over a fixed period, especially as interest rates rise, it could end up costing you more. A fixed rate is generally higher than a variable rate as it poses a greater risk to the bank."

Paul Stevens, chief executive of Just Property believes the repo rate will only reach 6.5% by the close of 2024.

"Interest rates are expected to rise gradually to 2024, so prospective bondholders should look at what they can afford beyond the current interest rates."

However, if you choose to fix your interest rate now, he says it will "certainly be at a rate higher than what the banks will offer at a variable rate".

"Many people see a fixed-term loan as a means to secure peace of mind; you know what you're committed to for the long term. However, fixed rates are offered for a limited period, and you will need to renegotiate the terms a number of times over the term of your 20-year loan.

"In fixing your bond interest rate now, you are essentially hedging your bets for the next five years. After that, you'll need to regroup."