Homeowners and future home buyers often consider fixing the interest rates on their home loans – and with concerns about inflation and rising living costs, this has become a hot talking point once again.
Fixing your interest rate means that you will know what you will pay on your bond each month, irrespective of where we are in the rate cycle – but is this the right option for you?
Unfortunately, there is no simple answer as each person’s financial situation is unique and will need a careful and thorough evaluation to ensure they make the best decision for themselves.
When applying for a home loan, it is by default on the basis of a variable interest rate. Once your bond has been registered, you can apply for a fixed interest rate, and there is a time limit attached before the offer lapses.
To help you decide on the most suitable interest rate option, you have to make sure you understand the key differences and how interest rates work.
Repo rate vs. prime lending rate
To make an informed decision, it’s essential to understand two key financial terms:
- Repo rate: Set by the Reserve Bank, this is the interest rate at which commercial banks borrow money.
- Prime lending rate: This is the rate that banks charge consumers, which includes additional costs and risk factors.
- Your loan rate: The actual rate you receive depends on your credit profile, repayment history, and affordability.
Currently, the prime lending rate is 11.25%. If the repo rate rises, banks adjust the prime lending rate accordingly, affecting variable-rate loans.
Fixed vs. variable interest rates: pros and cons
| Factor | Fixed Interest Rate | Variable Interest Rate |
|---|---|---|
| Predictability | Monthly repayments stay the same for the fixed period. | Payments fluctuate with interest rate changes. |
| Cost | Generally higher than variable rates. | Usually lower initially, but can increase. |
| Flexibility | Locked in for up to 5 years, then must renegotiate. | No lock-in period; adjusts with market. |
| Risk Exposure | Protected from rate hikes but won’t benefit from drops. | Benefit from rate drops but vulnerable to increases. |
If you already have a variable interest rate on your home loan, it is always best to pay it off as fast as possible. This will not only assure that you build up equity in your loan, which you can access later should you need to, but paying more than the minimum amount on your home loan will also help you cut down on interest charges. If times do get tight and you have been diligently paying extra into your home loan every month, you could potentially approach your bank and ask to refinance the home loan based on the equity you have built-up within the account.
Key Considerations
1. Loan term
Fixed interest rates are typically available for up to five years. On a 20-year loan, you will need to renegotiate the terms, which could be less favorable than before.
2. Loan repayment period
The longer your loan repayment period, the more significant the impact of interest rate fluctuations on your monthly payments.
3. Rate concessions
Bond originators can approach multiple banks on your behalf to secure a lower interest rate.
Making the right decision
While market trends are important, your ability to afford repayments should be the deciding factor. Consider the following steps:
- Use a bond repayment calculator to compare fixed and variable rate scenarios.
- Consult a financial advisor or a bond originator to assess your best option.
- Consider downsizing if affordability becomes a concern—long-term financial security is more important than keeping a home you cannot afford.
Before committing, weigh your financial stability, risk tolerance, and long-term goals. A well-informed decision today can save you thousands in the future. While it’s hard to predict when interest rates will increase (or drop), it’s sensible to factor the possibility of an interest rate into your calculations whenever you choose to buy. Owning a home is a long-term financial commitment, which means that at some stage during the loan term, a homeowner will eventually have to deal with the interest rate changing.
Article Source: https://www.myproperty.co.za/news/market-and-opinion/should-i-fix-the-interest-rate-on-my-home-loan-04-03-25
