Should you fix the in­ter­est rate on your home loan?

Finweek English Edition - - Cover Story -

The pri­mary ob­jec­tive

of a fixed rate is to cap the in­ter­est rate on a mort­gage loan at a cer­tain level for a lim­ited pe­riod. The level of the fixed rate varies ac­cord­ing to the pe­riod over which it is fixed, as well as the loan amount and the loan-to-value ra­tio.

Ac­cord­ing to Absa, the ad­van­tage of a fixed rate is that the mort­gage rate will not in­crease when in­ter­est rates rise. This helps house­holds cope with the neg­a­tive ef­fect of rapidly ris­ing in­ter­est rates, mak­ing it pos­si­ble for them to keep up with mort­gage re­pay­ments and pre­vent­ing banks from hav­ing to re­pos­sess prop­er­ties.

The dis­ad­van­tage is that a fixed mort­gage rate may well be above the vari­able rate for a cer­tain pe­riod of the fixed-rate con­tract, and clients are locked in for the full term of a fixed-rate con­tract.

“Eco­nomic fore­casts are of­ten not ac­cu­rate and rarely help you to un­der­stand risks over a 20-year home loan. In­stead of try­ing to time or beat the mar­ket be­fore an in­ter­est rate in­crease, fixed rates could be valu­able tools to help cre­ate cer­tainty,” says Ewald Keller­man, Absa head of cus­tomer in­ter­ac­tion: home loans.

Keller­man says the re­cent in­ter­est cut of 25 ba­sis points and ex­pected rate cut in Septem­ber is al­ready priced into fixed rates, re­duc­ing the cost. But if rates were ex­pected to in­crease, rates would be more ex­pen­sive. ■

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