The interest rate is predicted to increase again this month by a probable 0.5%, and for South African homeowners, it will be the latest in a string of increases this year.
When the rate started its climb after record lows in 2020, many started squirming, wondering if they should be fixing their home loan rates to protect against future hikes; the expert advice at the time was ‘no’.
Now, however, they are starting to shift their thinking. But what exactly should they be thinking?
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FNB property economist John Loos has some pearls of wisdom for homeowners in this situation, although he never advises anyone to merely fix their rates or keep them flexible. The decision depends on each individual’s appetite for risk.
However, fixed rates “aren’t a tool” with which to try and beat the market.
“You fix your rates to sleep comfortably at night; you fix your rates to have certainty over a portion of your cash flow. And you live with your decision, knowing that you may ‘lose’ some and you may ‘win’ some, depending on where interest rates move to in future.
“The main reason for fixing rates is because the future is uncertain.”
Interestingly, he adds, even if you are inclined to fix your rates, you should probably expect to find less attractive fixed rates on offer in an interest rate hiking cycle. This is because banks also need to hedge their risks against taking on a client’s floating rate, and they do so in the swap market where ‘forward rates’ and market expectations, to a large extent, determine the fixed rate that a bank can offer.
If the market expects interest rates to increase, as it often does when they are in the process of being hiked, fixed rates offered will often move higher.
“So you get more attractive fixed rates when the interest rates are declining or at least expected to decline.”
Loos' “tip” to buyers and homeowners is this: “If you are keen on fixing your rates, the time to look for more attractive fixed rates is often when interest rates are being cut or expected to be cut. Ironically though, this is normally the time when few people are looking to fix their rates, he says.
As with any financial decision, Careen Mckinon and Kay Geldenhuys of ooba Home Loans say there are benefits and risks to fixing your rates. Households on very tight budgets with little potential income growth could benefit in the long term from fixing their home loan rates, they say in a joint statement.
“And, if you are entering into the market for the first time, the fixing of your rate could be a sensible option as it will provide you with protection from rate increases in the future.
The trick to interest rate fixing is taking the long-term view.
“If you believe that that the interest rate will continue to go up, then it’s worth taking the short-term increase for the longer term benefits. Right now we are in an upward interest rate cycle, therefore borrowers should conduct a sensitivity analysis on what interest rate increase they are able to absorb.”
To sum it up, Mckinon and Geldenhuys say: “If it will give you peace of mind to be able to budget your repayments at a fixed rate into the future, then it’s a good time to fix. On the other hand, if you would like to continue to benefit from the current low rate for as long as possible, and believe that the interest rate might come down in the longer term, then it’s best to wait it out, particularly if you are enjoying a very attractive variable rate below the current prime lending rate.”
Carl Coetzee, chief executive of BetterBond, says there is no simple answer when it comes to evaluating the benefits of a fixed or variable interest rate as each buyer’s financial situation and circumstances are unique.
“While it can be reassuring having a fixed rate so that you know what your instalment will be over a fixed period, especially as interest rates rise, it could end up costing you more. A fixed rate is generally higher than a variable rate as it poses a greater risk to the bank.”
Loos adds that he believes the country is “hitting the peak”, or is “fairly close” to reaching the peak of inflation.
“And at FNB, we also believe that we are close to the peak of the prime rate. We think that there will be a 0.5% increase in November, but after that, the interest rate will move sideways.”
While predicting anything over the next two to five years is risky and there are “many scenarios” to consider, ultimately he believes the interest rate will peak at a 10.25% prime rate in 2023.
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