Is it really time to fix your mortgage rate?

Ian Wason, MD of the debt management group Bondbusters.co.za, reminds people to look at all the options before going out and looking for a fixed mortgage rate.

According to Wason, homeowners have two options: hang on or get out of the property market altogether. If you have cut your budget again and again and can’t seem to make ends meet you should consider selling some assets as one thing is for sure — your situation will get worse as interest rates, oil and food prices continue to rise.

“Debt consolidation, remortgaging and reducing other monthly expenses should be looked at before people decide to fix their rates. We are seeing a lot of opinions as to where interest rates are going at the moment. These are just opinions, as nobody really knows. We are seeing a lot of ‘false horizons’ as to where the top of the interest rate cycle is purely because we have no idea where oil and food prices will go and this is now what is causing the inflationary pressure, not the demand side driven by easy credit.

“It was the combination of negative equity and a stalling economy that sent the UK property market down 35 percent in the early nineties. I believe the problems in SA at the moment are on a similar scale.”

Homeowners must not forget that the chances are they could rent the same property for less than half of what they are paying in mortgage repayments on a 100 percent mortgage.

Don’t follow the trend

“While rates are rising at a speed that is crippling, it is important to remember that you don’t have to stick with the rate that you got at the start of your current mortgage. So, after you have had your mortgage for a while you may be able to negotiate a better interest rate because you could be a far less risky client to the bank. If you fix your rate now, you may be negating the benefits that a variable rate would allow in the long term. It is important that you shop around for a better rate on your current mortgage before joining the wave of fixed rate enthusiasts,” says Wason.

In addition to this, the individual should also do a complete analysis of their expenses and try to reduce their insurance, bank and medical aid costs.

Remortgaging could be a better option, so shop around

Wason argues that while a fixed rate may be worth your while for the next 18 months, it is important to remember that your mortgage is going to last at least 20 years. In that time, you may well be able to negotiate a better rate on your bond as your salary increases or your reduced risk profile starts to take effect.

“South Africans need to get far more dedicated to shopping around for a better rate — they would be surprised what they could be saving themselves.”

A fixed rate could just cost you

He adds that going out and seeking a fixed rate mortgage can be costly because nobody knows how long the rates rise is going to continue. “While the mood at the moment seems to suggest that we should all go out and fix our mortgage rates, it is important to view this in light of your own situation.”

“If you could be getting a better rate on a variable bond, you are better off trying to negotiate that. Don’t simply call up and ask what fixed rate the bank could offer you.”

Looking at the numbers

For a R500 001 mortgage, where your loan to value is less than 80 percent, you can currently fix your rate for the following rates:

  • One year — 14.8 percent — R6510.20 payment per month (ABSA)

  • Two years — 14.6 percent — R6436.68 payment per month (ABSA)

  • Five years — 14.7 percent — R6473.41 payment per month (ABSA)

  • 10 years — 14.05 percent — R6235.79 payment per month (ABSA)

  • 20 years — 16.75 percent — R7239 payment per month (SA Homeloans)

For the same mortgage on a variable rate you should be getting a rate of prime less two percent or 14 percent if we factor in an expected interest rate increase of one percent. Your repayment will therefore be R6217.63.

Another option would be SA Homeloans’ interest only rate of 13.5 percent, giving you a repayment of R5995. This is the lowest monthly commitment but be reminded, however, that you are not paying off any capital.

What should you do?

It is important to remember that everyone’s situation is different. No option is best for everyone so you need to do your own budget, establish what your priorities are and take the mortgage that best suits your situation. Also remember that you can always change your mortgage product again, as you may decide to get an interest only mortgage, ride our these stormy times and switch back to a capital and repayment mortgage once interest rates start coming down or when you can afford to pay more in.