JOHANNENSBURG (April 10) - Fixed home loan rates became popular in 1998 when homeloan rates catapulted to 23,5% and the prime lending rate reached an extreme high of 25.5%.

Financial institutions offer fixed-rates on home loans for which the interest rate is predetermined for a certain period of time and does not vary in line with the Reserve Bank’s repo rate. Deon Lessing, marketing director of Betterbond, provides insight on fixing homeloan rates.

“The main benefit of fixing a homeloan rate is the certainty that it provides for the homeowner,” says Lessing. Some homeowners prefer having peace of mind with regard to their monthly bond repayments and a fixed rate means that they are better able to budget for expenses.

Lessing says that homeowners can benefit from fixing their interest rate, but that it is imperative they know when to fix their rate and also be aware that banks may charge a penalty to switch from a variable interest rate loan to a fixed rate loan.

The obvious disadvantage of fixing homeloan rates is if the interest rate drops below the levels at which the homeowner’s loan is fixed.

“If interest rates are forecast to rise, a fixed rate is the better option, and if rates are expected to drop quickly, then one shouldn’t be looking into a fixed rate. However if interest rates are expected to drop slowly, the homeowner may benefit from fixing their rate for a short period of time.” says Lessing.

Lessing recommends that homeowners not fix their homeloan rates for longer than a 12 month period as the fixed rate option may not be terminated prior to the expiry of the agreement. After the fixed rate term expires, the rate will revert back to a variable interest rate, unless the homeowner decides to renew the fixed rate option at a rate offered at the time of negotiating. “It is essential that homeowners monitor the variable interest rate fluctuations in order to prepare themselves should the variable rate at the end of the fixed rate period be much higher than the fixed rate,” says Lessing.

“Before making any decisions homeowners should vigilantly assess their risk tolerance as well as their ability to cope with repayments in the event of interest rates increasing. The more conservative a homeowner is with taking risks, the more a fixed rate homeloan may suit them. They should also take into consideration how they prefer to structure their finances as a whole,” Lessing concludes.

INTEREST RATE CHANGES 1986 – TO DATE
HOMES LOANS AND PRIME LENDING RATE

Article by: www.anneporter.co.za