To fix or not to fix
I NTEREST RATE: Some say yes, others suggest otherwise
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.
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...