Another rate hike coming, should you fix the interest rate on your home loan?

With interest rates set to rise again at the end of July, new buyers can now consider whether to lock in the interest rate on their home loan to create protection against further rises.

Samuel Seeff, president of the Seeff Property Group, says the decision of whether or not to fix your interest rate is up to the individual. He says that in his more than 38 years in the industry, the interest rate has averaged around 12% to 16%.

So at 8.25% and even bringing it back to the 10% level where it was before the start of the Covid-19 pandemic, it is still well below average.

Floating interest rate

This is generally the norm when it comes to interest rates. A floating rate is directly linked to the prime or base rate on home loans and adjusts when the repo rate (redemption rate) is adjusted by the Reserve Bank of South Africa. These adjustments are made in increments called basis points. For example, the last rate hike was 50 basis points, which equals half a percent.

When there is a rate adjustment, whether up or down, the interest rate on your home loan (and other credits and loans) will adjust accordingly.

Fixed interest rate

A fixed interest rate is a flat rate that is fixed for a period of time, which means that if there is an interest rate adjustment, your home loan rate will not adjust. This does mean, however, that if the interest rate drops, you won’t benefit from the savings on the lower rate, but you also won’t have to pay more if the rate rises.

The downside is that a fixed rate is usually set a few percentage points above the going rate, usually above 2%. In South Africa it can usually only be repaired for 3-5 years compared to overseas where you can repair it for up to 10-30 years.

Although it lets you plan with certainty, it’s only for a short time and the rate may not reach your fixed rate amount, meaning you don’t benefit if the rate drops.

Fight against rising interest rates

Seeff says investing a deposit up front is a great way to ensure you have a financial reserve. This will reduce the amount you need to borrow and allow you to accumulate capital value faster.

You should also aim to invest all available money in your home loan as another way to reduce the repayment period and the interest you will pay in the long run. Keeping the repayment steady when the rate drops is one way to build equity and the sooner you can pay off your home, the higher the equity value and equity you can accumulate.

Bernadine J. Perkins