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Fix it?
Posted Thu, 10 Apr 2008
It’s no surprise that fixing interest rates on home loans became popular around 1998 when prime was at 25.5 percent. Although not nearly as bad, it’s creeping up again which begs the question — to fix or not to fix?
Financial institutions offer to fix the interest rate on home loans for a certain period of time meaning it does not vary in line with the Reserve Bank’s repo rate. Deon Lessing, marketing director of Betterbond, provides insight on fixing home loan rates.
“The main benefit of fixing a home loan rate is the certainty that it provides for the homeowner,” says Lessing. Some homeowners prefer having peace of mind with regard to their monthly bond repayments and a fixed rate means that they are better able to budget for expenses.
Know when to fix
Lessing goes on to say that homeowners can benefit from fixing their interest rate, but that it is imperative that they know when to fix their rate and also be aware that banks may charge a penalty to switch from a variable interest rate loan to a fixed rate loan.
The obvious disadvantage of fixing home loan rates is that the interest rate may drop below the level at which the homeowner’s loan is fixed.
“If interest rates are forecast to rise a fixed rate is the better option, but if rates are expected to drop quickly fixing the rate would be a bad idea. If interest rates are expected to drop slowly, the homeowner may benefit from fixing their rate for a short period of time,” says Lessing.
Don't fix for more than a year
Lessing goes on to recommend that homeowners not fix their home loan rates for longer than a 12 month period as the fixed rate option may not be terminated prior to the expiry of the agreement. After the fixed rate term expires, the rate will revert back to a variable interest rate, unless the homeowner decides to renew the fixed rate option at a rate offered at the time of negotiating. “It is essential that homeowners monitor the variable interest rate fluctuations in order to prepare themselves should the variable rate at the end of the fixed rate period be much higher than the fixed rate,” says Lessing.
“Before making any decisions homeowners should vigilantly assess their risk tolerance as well as their ability to cope with repayments in the event of interest rates increasing. The more conservative a homeowner is regarding risk taking, the more a fixed rate home loan may suit them. They should also take into consideration how they prefer to structure their finances as a whole,” Lessing concludes.
