Is Fixing Your Interest Rate a Good Decision?

Have you ever thought about fixing your interest rate? If you’re paying off a bond or home loan, you were probably very relieved when the South African Reserve Bank (Sarb) Monetary Policy Committee (MPC) announced that they would not be hiking the prime interest rate.

Fixing Your Interest Rate

If you had to change your lifestyle due to your home loan payments increasing after several repo rate hikes over the last year, fixing your interest rate may save you money. You can ask your bank to fix your interest rate, so that it stays the same even if the prime interest rate is hiked.

However, here are a few things to consider before fixing your interest rate.

‘…the prime lending rate will keep on increasing’

Higher Interest Rate

This is how banks protect themselves from the risk of losing money, should the prime interest rate go up again. For example, if you are now paying a 10.5% interest rate on your home loan payments, your bank may let you fix your interest rate at 11 – 11.5%.

Basically, this means you will be paying now what you will have to pay in the future anyway. We know that the prime lending rate will keep on increasing over the years, well beyond your fixed interest rate. Hence, your rate will remain fixed and you’ll save money going forward.

This is how you can protect yourself from future increases.

‘…you can avoid interest rate increases.’

Small increase, Big Cost  

Over the lifetime of a R1 million home loan, paid off at a 10.5% interest rate over a 20-year term, your monthly payment will be R9 983,80, and you will end up paying R2 396 111,73 for your home in total.

Just a 0.25% hike in the prime lending rate to 10.75% will increase your monthly payments to R10 152,29, and you will end up paying R2 436 549,49 – that’s R40 437,76 more!

By fixing your interest rates you can avoid interest rate increases.

‘…you can only dodge hikes in the short-term’

Not Permanent

Banks generally only allow you to fix your interest rate for certain period. So you can only dodge hikes in the short-term, typically for a term of one to five years. When this term ends, you will need to renegotiate your rate.

By following the news and tracking the repo rate, you can speculate whether a fixed interest rate would be beneficial to you. Will you end up saving or losing money by fixing your interest rate? It may be wise to ask a financial advisor, before making your move.

‘…your biggest expense won’t increase’

Better Financial Planning

A guaranteed benefit of fixing your interest rate is that you will be able to plan your finances better. With soaring food, electricity and petrol prices, it may reassure you to know that your biggest expense won’t increase for a while.

Decisions…Decisions…

Analysts may be able to be able to guess at whether the repo rate will be hiked, kept the same or dropped, but they do not know for certain. The MPC has to consider many factors that change on a daily basis, when making their decision.

As you cannot predict for sure how the repo rate will change or not, you should only fix your interest rate if it suits you personally. Ask yourself if you’re willing to pay a bit more so you can plan your finances better over one to five years, or if you’d rather go with the tide of the repo rate.

It’s not an easy decision. But no matter your choice, ensure that you are doing what’s best for you. Is your home a long-term investment, or do you have a short-term plan to sell? Asking yourself these questions will guide your decision of whether or not to fix your interest rate.