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When interest rates rise, homeowners and aspirant buyers often consider the option of fixing the interest rate on their bond to avoid future price increases. Although economists expect the repo rate to hold steady this month, concerns about inflation and rising living costs have homeowners concerned about affordability.
This means that the option of knowing what you will pay on your bond each month, irrespective of where we are in the repo rate cycle, is once again a talking point.
Unfortunately, there is not a simple answer when it comes to evaluating the benefits of a fixed or a variable interest rate that will fluctuate in line with the repo rate.
When applying for a home loan, it is by default on the basis of a variable interest rate. Only once your bond has registered can you apply for a fixed interest rate and there is a strict time limit attached before the offer lapses.
The following factors will help you decide on the most suitable interest rate options for your specific needs.
Understand the repo rate and prime lending rate
The repo rate is set by the Reserve Bank and indicates the rate at which they loan to commercial banks.
This is not the same as the prime lending rate, which is the rate at which banks lend to consumers. Banks have running costs and other expenses which, when calculated with the risk of loaning money, result in the prime lending rate. The interest rate which banks will offer depends on your credit profile – including whether you have maintained regular payments – and affordability.
Currently, the prime lending rate is 10.75%. The next meeting of the Reserve Bank’s Monetary Policy Committee, which could result in a change to the repo rate, is on 30 March.
Loan term
Fixed interest rates are set for up to five years maximum which means that on a 20-year loan you will need to renegotiate the terms, and these terms could be less favourable than they were before.
Generally, a fixed interest rate is higher than a variable rate as it poses more of a risk to the bank. It is only negotiated at the time of bond registration and the rate offered is dependent on the going rate at that specific time.
Loan repayment period
The longer the loan repayment or amortisation period, the larger the influence a change in the interest rate will have on your repayments.
Rates concessions
Remember too that bond originators can apply to more than one bank on your behalf to secure a lower interest rate, or a rate concession. By approaching more than one bank, (a bond originator) is able to negotiate a better rate concession as the banks compete to offer the best deal based on the buyer’s risk profile. Banks determine this risk differently, which affects the rates concession each will offer.
While market conditions are useful, it’s even more important to remember that past trends are not always good indicators of future performance. The determining factor when it comes to deciding on whether to fix the interest rate on your bond should be affordability.
Carl Coetzee is CEO of BetterBond.
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