The SA Reserve Bank is generally expected to continue increasing the repo rate at its Monetary Policy Commission meetings in 2022. This once again raises the question of whether you should fix the interest rate on your home loan or keep it variable.
When you apply for home loans, you should always shop around to secure the best deal possible - preferably through an experienced bond originator. The best deal does not necessarily mean the highest loan amount but rather the best possible interest rate from the outset. Also, always keep in mind the long-term nature of a home loan - usually 20 years or more.
Fixed-rate
The advantage of a fixed interest rate is that you can plan your budget with the certainty that you won’t unexpectedly have to increase your home loan repayments.
However, there is a cost when fixing the rate. It is tricky to get the timing just right, so you need to carefully consider whether or not this is the best option for you.
The best time to fix interest rates on a home loan is when interest rates are low. But most homeowners only start considering this when interest rates are already increasing – and there is no way of predicting how high they will go.
The banks need to take a long view on future interest rates. This means that in a market where interest rates are expected to rise, the banks will only offer to fix the rate after taking into account their expectations of future interest rates.
Also, banks will only fix the rate for a maximum term of five years to manage their risk. Once the fixed-rate contract expires, your home loan will automatically revert to the prevailing variable rate - unless you apply for a new fixed-rate loan. This will almost certainly be a much higher interest rate than your current rate.
Variable-rate
Although a variable rate on a mortgage bond means that you need to be flexible in your monthly budget, it is generally considered a better choice than a fixed rate option. This is because banks won’t fix the interest at the same interest rate you would be granted on a variable interest rate loan. As a result, the fixed interest rate home loan will be higher – usually 2% or more - than the variable rate mortgage they would offer you at the time the loan is initially granted.
On a long-term loan such as a mortgage bond, it is more likely that you would pay less overall if you opted for a variable interest loan than a fixed interest loan.
Minimise interest
You can take several steps to minimise the payment of interest on your home loan.
Always put down the biggest possible deposit when buying a property. This will help you secure a lower interest rate on your home loan. Also, monthly repayments will be lower, which means you can repay the loan more quickly if you pay more than the minimum amount each month.
If possible, make sure you do pay more than the minimum payment each month. For example, just R500 extra a month on a R1 million bond initially taken over 20 years could reduce the total amount you pay for your property by hundreds of thousands of rands. It will also considerably reduce the repayment period, so that you will be bond free far sooner.
You should also try to make extra repayments whenever you have additional funds available - for instance, a bonus, a lotto payout or a tax refund. Again, this will benefit you in the long run.
You should also stay in touch with your bank manager and keep an eye on the interest rate being charged. Once you have established a good track record with the bank, you may be able to negotiate a reduction in the interest rate on your home loan. If you then maintain the original monthly repayments, you will be able to repay the loan more quickly.
Interest rates tremendously impact home loan repayments. It’s therefore important to pay particular attention to them and consult the bank if the need arises.
