To fix or not to fix

I NTER­EST RATE: Some say yes, oth­ers sug­gest other­wise

Weekend Witness - - Scene Around - MAL­COLM REES

WITH in­ter­est rates cur­rently at a 35-year low, the sug­ges­tion has been made that those with home loans or those think­ing of ap­ply­ing for one may stand to ben­e­fit by fix­ing the in­ter­est rates on their mort­gage re­pay­ments.

FNB has re­leased a state­ment to its home-loan cus­tomers sug­gest­ing that “now is the time to con­sider fix­ing your rate”.

How­ever, with the charges at­tached to fixed-in­ter­est rate loans cur­rently at around two per­cent above those for mort­gages with prime-linked, or vari­able rates, for a five-year loan the cost-sav­ings po­ten­tial of the fixed-rate op­tion re­mains de­bat­able.

By FNB’s own ad­mis­sion the win­dow for sub­stan­tial sav­ings through fixed rates has now passed. Ac­cord­ing to Mar­ius Marais, CEO of FNB Hous­ing Fi­nance and au­thor of FNB’s state­ment, the best time to fix your in­ter­est is to­wards the tail end of a rate-cut­ting cy­cle when down­ward or side­ways move­ments in the in­ter­est rate are still ex­pected.

“At some point [dur­ing the rate­cut­ting cy­cle] the pre­mium was very low, it was ac­tu­ally sitting at about 50 ba­sis points,” he said.

At the time of writ­ing, how­ever, FNB was charg­ing a 200 ba­sis point, or two per­cent pre­mium, on its fiveyear fixed-rate op­tion.

Ned­bank cur­rently charges a 2,25% pre­mium.

It is now gen­er­ally agreed that SA’s in­ter­est-rate cy­cle has al­ready bot­tomed out with grad­ual hikes ex­pected to be­gin to­wards the be­gin­ning of 2012.

Marais ar­gues that it is “prob­a­bly a good time where we are at the mo­ment to con­sider that [fix­ing your rate] at least.”

He is joined by Greg Salter, Ned­bank home loans head of risk, who sug­gests that “it is ob­vi­ously gen­er­ally bet­ter to con­sider fix­ing your rate when in­ter­est rates are low … on that ba­sis it would def­i­nitely be a good idea to be look­ing at it at the cur­rent time”.

Marais sug­gests that SA’s in­ter­est-rate hikes tend to be char­ac­terised by move­ments well above 200 ba­sis points, fluc­tu­at­ing at ex­tremes around five per­cent above the cycli­cal lows, thus pre­sent­ing a rea­son­able chance for long-term sav­ing. How­ever, Jac­ques du Toit, sec­tor an­a­lyst at Absa, dis­agrees.

“I don’t be­lieve it is re­ally an op­tion at the cur­rent stage be­cause rates are most prob­a­bly go­ing to move side­ways for quite a cou­ple of months up un­til late this year or early next year be­fore start­ing to in­crease and then it will be a grad­ual rate-hik­ing cy­cle. We ex­pect the rates to be in­creased by 50 ba­sis points dur­ing the course of next year so it will be grad­ual.”

The two per­cent pre­mium on the vari­able rate will be breached “maybe 18 months down the line, so for an 18-month pe­riod you will lose on a monthly ba­sis”, says Du Toit.

Es­sen­tially, the pre­vail­ing ex­pert opin­ion re­gard­ing the in­fla­tion, and thus in­ter­est, out­look is priced into the pre­mi­ums at­tached to fixed rates.

This im­plies that, on av­er­age, a con­sumer is un­likely to see a sig­nif­i­cant long-term net sav­ing, al­though the fixed-rate op­tion as the pre­mium should roughly nul­lify fu­ture up­ward in­ter­est move­ments. Even when try­ing to catch the tail end of a rate-cut­ting cy­cle to ben­e­fit from lower fixed-rate pre­mi­ums the con­sumer faces sig­nif­i­cant risk.

“The prob­lem is you are tak­ing a view as to how the in­ter­est-rate cy­cle will pro­ceed, and if you’re wrong, then you’re on the wrong side of the bid,” says Cees Brugge­mans, FNB’s chief econ­o­mist.

All con­sid­ered, the typ­i­cal con­sumer would have to beat the mar­ket in his or her ex­pec­ta­tions of in­ter­est-rate move­ments in or­der to see a real sav­ings ben­e­fit through the fixed-rate op­tion.

— Money­web.


At an Espresso busi­ness net­work in Pi­eter­mar­itzburg this week were (from left) Dr Ra­jen Coop­pan, Sam Naicker, Sally Subra­money, Jonathan Daniel, Amanda Govender and Bren­dan Clar­iv­ette, who are all from the First Cor­po­rate Group of Com­pa­nies. The...

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