With rates on the march, do you fix or float?
Home owners need to weigh their long- and short-term goals carefully as more interest rate increases hove into sight.

Property economists said deciding between fixed and floating interest rates on property loans, and deciding whether to rent or buy a property, were important considerations.

John Loos, an FNB property strategist, said that because interest rates were rising the focus was on fixed interest rates.

But he cautioned that fixed interest rates should not be seen as a way to beat the market. He said his economics team expected a half percentage point rate increase by the Reserve Bank this week. That would take the prime lending rate to 14.5percent.

He said: “Fixed rates should be seen as a service for a certain period, to shift risk onto the bank. The bank assumes and manages the interest rate risk, and the client obtains certainty over cash flows for fixed interest- rate payments.”

But Loos said the benefit came at a price. If the average floating rate did not rise to the chosen fixed rate, the client might have been better off allowing his interest rate to float. The average floating rate on a bond for the entire period of the fixing must exceed the fixed rate for the period.

“Conversely, if people prepared to take more risk feel, like us, that interest rates might be near the peak of their cycle, they might feel that they are losing out on an opportunity by fixing their rates.”

Loos said first-time property buyers could increase the certainty on repayment cash flows by living within their means and buying within their financial limits.

He said the issue of ownership versus renting was a “personal choice”.

“Ownership might encourage greater financial discipline than renting because of the incentive to invest in one’s own asset .

“One might sacrifice a significant amount of consumption expenditure over the years in order to finance this investment (financing upgrades and maintenance, or paying off the bond quicker), thereby ending up better off financially in the longer term.”

He said tenants did not have to worry about bond payments, maintenance costs and unexpected expenses, and renting was particularly beneficial for people who moved frequently.

“Renting can be a better option in the short term regarding cash flow, but ownership could be the better option in the long term.”

Loos said many rents were less than monthly bond repayments.

He added, however, that over 20 years property owners had to deal only with increased operating costs, whereas tenants had to deal with annual rent increases.

Article by: Xolile Bhengu - www.sundaytimes.co.za