Too late to fix home loan rate
Johannesburg - It’s probably too late for homeowners to fix their home loan interest rates at a favourable level.
Property analysts agree: the best opportunity for a homeowner to get an attractive fixed mortgage rate is when interest rates are on the way down.
Interest rates are currently believed to have bottomed and they are expected to start rising later this year.
Fixing an interest rate means that a homeowner with a mortgage loan at his bank agrees to an interest rate that remains constant, despite interest-rate changes announced by the Reserve Bank. The fixed rate offered by banks will generally be higher than the prevailing rate. This fixing will also be valid only for a specified period, usually one or two years.
Jacques du Toit, senior property analyst at Absa Home Loans, said a favourable time to fix rates is when a small margin exists between the variable and the fixed rate. He said homeowners pay a premium for a fixed rate, which can vary from bank to bank.
Factors affecting rates include the consumer’s credit profile and his spending and saving patterns.
He said a fixed rate was therefore inappropriate for a consumer wanting to save money, as his monthly payment would be higher.
In South Africa a relatively small percentage of homeowners with mortgages fix their rates, largely because interest rates in this country tend to be very volatile.
First National Bank (FNB) property analyst John Loos said the purpose of a fixed rate was not to try to beat the market, but rather to have certainty about one’s future cash flow.
He said the decision whether or not to fix rates depended on a homeowner’s appetite for risk and his financial situation. For those without a financial cushion against economic shocks it could be beneficial to fixed rates.
But homeowners need to hurry because interest rates are expected to rise, meaning that a fixed rate becomes less and less attractive. Fixing an interest rate is venturing an economic forecast.
Erwin Rode, property valuer and economist at Rode & Associates, said that in principle it is not a good idea to fix mortgage rates because the likelihood of beating a bank's economist is less than 50%.
Then there is the practical problem of a homeowner having to pay a premium.
He said it is however important for a prospective home buyer to buy a house within his means, so that he has financial manoeuvrability in the event of interest rates starting to rise.
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Just manually fix it. Do the recalc on what the bank would fix you at and pay that amount. If the bank says they will fix it for 2% higher than your current rate, ask them what your repayments will be. Phone the mortgage department and ask them to fix your repayment at that rate. Not only will you then be paying more capital, you will also not be affected (cashflow wise) by increases. You are only affected when the rate increases by more than 2%. I know this is not true fixing of rates, but it is much cheaper and more beneficial for you. Also, as soon as the rates increase by more than 2%, phone again and ask them to recalculate your bond. You will find that it will decrease slightly as they are aligning the extra capital repaid with the remaining period.
excellent suggestion JJR! I hope lots of people consider this.
This is of course the same as having an "access" bond and dumping your monthly salary in there....just a little more specific to the person who wants to fix his/her bond who does not have that facility available.
Best comment I read on any article in a very long time. I paid my mortgage much earlier as follows:
1. when the rate goes down I kept my repayment constant
2. when ever I got a salary increase I increase my repayments with the same percentage
3. when I got bonus most of it went to the bond
4. when rates goes up, I kept my payment constant unless the required repayment is higher than my current repayment
I built my house when interest rates was quite high and it only went up 1% or 2% above the initial rate but for most of the time it was lower.
If you want to buy now, you have to be in a position to afford a repayment at a rate about 2% higher than the current rate to keep surviving when rates is going up again, else grade down your borrowing amount.
Totally agree with JJR, banks only offer to 'fix' rates to benefit themselves anyway. I ampaying off my house with a 20 year bond in just 8 years by shoving every spare cent into my mortgage account. Its amazing how it makes a difference.
If you take out a bond for R1 million over 20 years at 10%, you will pay R9650.22 per month for 20 years. If you increase your payment by R1095.83 per month, your bond will be paid off in 15 years. R13215 per month will see you debt free in 10 years time. So if you can afford a little bit more, go for it!
Good example there. What I really hate about bond mortgages is the interest we are paying. I'd rather be earning interest as opposed to paying someone interest.