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Time to fix interest rates?

The prime overdraft rate at which commercial banks charge homeowners on their mortgages has climbed to 10.25% at the end of last month, from 8.5% at the start of 2014.

FNB forecasts that rates will increase by another percentage point by early next year. London-based Standard Chartered Bank forecasts the repurchase rate to remain at 6.75% through the end of June.

MMI Holdings’ forecast is for rates to increase another three times by 0.25 percentage points this year and in 2017.

The cost of servicing debt has increased by more than 20% over the period and as SA’s economy is hit by layoffs in the mining sector and rising food and energy prices, consumers are struggling to cope.

With the latest 50 basis-point increase in interest rates, many homeowners may well wonder whether they should fix their interest rates at the current level.

Fixing your mortgage bond’s interest rate depends on a person’s level of risk aversion, says John Loos, household and property sector strategist at FNB.

“There is no right or wrong when it comes to fixing an interest rate,” says Loos. “I’ve never in my life fixed an interest rate.”

Banks’ appetite for allowing borrowers to fix interest rates is limited by the interest-rate swap market.

Fixed rates on offer are largely determined by market expectations of future interest rate moves. Therefore fixed rates on offer are often less attractive when rates are moving up, than when they are moving down.

Loos says there is an alternative way to approach a rising interest-rate environment with regards to mortgage bond repayments.

“A borrower could set the monthly repayments from the start of the loan agreement much higher than the required payments,” he explains.

“When interest rates do rise, it wouldn’t affect the monthly repayment amount – up to a certain level. In addition, the borrower will also repay the home loan much faster.”

An additional strategy for homeowners is to increase their monthly repayments annually when they receive salary increases, Loos says. This would normally be an increase equal to or higher than inflation, he says. This way, the borrower will repay the loan faster and increasingly cushion future interest rate increases as the years go by.

In essence, consumers need to be circumspect when considering big purchases, such as a house or vehicle, ?Loos says.

One of the main factors that should be taken into account is the operational cost of a home or vehicle, according to him. These include rapidly rising rates and tariffs bills.

“Rather err on the side of caution when you buy a home,” Loos says. “Get a good grip on the operating costs of a house.”

Loos refers to anecdotal evidence that many homeowners scaled down their residences due to financial pressure even when interest rates were not in a rising cycle.

He also says that putting down a big deposit when a consumer buys a new house would benefit the borrower when they have to trade out of the larger home to a smaller one as there would be enough equity “to trade out easily”.

This article originally appeared in the 11 February 2016 edition of finweek. Buy and download the magazine here

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