The SA Reserve Bank is widely expected to continue raising the repo rate at its Monetary Policy Committee meetings in 2022. This again raises the question of whether you should fix the repo rate. interest on your home loan or keep it variable.
When applying for a home loan, you should always shop around for the best deal possible, preferably through an experienced bond originator. The best offer does not necessarily mean the highest loan amount, but rather the best possible interest rate from the start. Also, always keep in mind the long-term nature of a home loan – usually 20 years or more.
The advantage of a fixed interest rate is that you can plan your budget with the certainty that you will not have to unexpectedly increase the repayments of your mortgage.
However, there is a cost when setting the rate. It’s hard to get the timing right, so you need to carefully consider whether or not this is the best option for you.
The best time to set interest rates on a home loan is when interest rates are low. But most homeowners don’t start thinking about it until interest rates are already rising – and there’s no way to predict how far they will go.
Banks need to take a long-term view of future interest rates. This means that in a market where interest rates are expected to rise, banks will only offer to fix the rate after taking into account their expectations of future interest rates.
In addition, banks will only fix the rate for a maximum of five years to manage their risk. Once the fixed rate contract expires, your home loan will automatically revert to the current variable rate – unless you apply for a new fixed rate loan. This will almost certainly be a much higher interest rate than your current rate.
Although a variable rate on a mortgage bond means you need to be flexible in your monthly budget, it is generally considered a better choice than a fixed rate option. This is because banks will not set interest at the same interest rate that you would be given on a variable interest rate loan. As a result, the fixed interest rate home loan will be higher – usually 2% or more – than the variable rate mortgage they would offer you at the time the loan is originally made.
On a long-term loan like a mortgage bond, you’re more likely to pay less overall if you opt for a variable-rate loan rather than a fixed-rate loan.
There are several steps you can take to minimize the interest payment on your home loan.
Always make the largest down payment possible when purchasing a property. This will help you get a lower interest rate on your home loan. Plus, monthly repayments will be lower, which means you can pay off the loan faster if you pay more than the minimum amount each month.
If possible, be sure to pay more than the minimum payment each month. For example, just an additional R500 per month on a one million Rand bond initially taken out for 20 years could reduce the total amount you pay for your property by hundreds of thousands of Rands. It will also significantly reduce the repayment period, so you will be released from the deposit much sooner.
You should also try to make additional refunds whenever you have additional funds – for example, a bonus, lotto payout, or tax refund. Again, this will benefit you in the long run.
You should also keep in touch with your bank manager and keep an eye on the interest rate being charged. Once you establish a good track record with the bank, you may be able to negotiate a lower interest rate on your home loan. If you then maintain the initial monthly payments, you will be able to pay off the loan more quickly.
Interest rates have a huge impact on home loan repayments. It is therefore important to pay particular attention to this and to consult the bank if necessary.