Should you fix the interest rate on your home loan?
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. ■