Should I fix my mortgage bond rate?

Tony Clarke, MD of Rawson Properties, discusses this contentious issue.

One of the questions that he is most frequently asked, says Tony Clarke, is “should I fix the interest rate on my mortgage bond and, if so, at what rate and for how long?”

This question has arisen even more frequently since the SA Reserve Bank left the rates unchanged at the last Monetary Policy meeting. This gave some market watchers the impression that the bottom of the rate cycle is not far off – although many expect one more 50 basis point drop before the rates once again start their upward climb.

“When asked about rate fixing,” said Clarke, “No one can give hard and fast advice. I can, however, point out the conditions and terms on which rates are fixed and leave the homebuyer to make up his own mind.”

Those contemplating fixing their rates, said Clarke, are usually motivated by a desire to know exactly what their monthly expenditure will be in the foreseeable future.

Points to be borne in mind if fixed rates appeal to you, Clarke said, are that all rates have become more expensive as a result of the money supply crunch and that fixed rates vary depending on the size and length of the loan. Bonds for 80% or less of the loan value will qualify for a better rate than those for 81% to 100% of the value.

Similarly, the longer the loan period, the greater the likelihood that the borrower will have to pay a high rate, while the smaller the total value of the loan, the higher the rate will be. The credit track record of the borrower will also be taken into account.

Currently, says Clarke, fixed rates are being issued at 0,5% to 1,5% above prime. This means that the fairly large body of borrowers who in better times were able to secure loans 0,5 to 2% below prime are unlikely to benefit from a move to fix the rate now.

It has, too, to be realised that rates vary from bank to bank – it pays, therefore, to “test the waters” – and to know that no SA bank will fix your rate until the day the loan is registered. Prior to that the borrower will be given “indications” as to what he can expect to pay but these will be subject to change week by week.

Those who do like the security and peace of mind of a long fixed period, loan (say for ten years) will right now quite possibly find themselves paying a 15% rate i.e. 4,5% above the current rate and 5% above what many believe the rate will be in three months time.

“Any borrower wanting a fixed rate has, therefore, to become an amateur economist and to try and assess where interest rates will go once the deflation in house prices ends (probably by early 2010) and the economy starts to show inflation generating real growth – which most people believe will take another year.”

Clarke revealed that he himself has never fixed rates, preferring to try and negotiate the most favourable terms possible at the time of purchase – although, he said, he is sympathetic to the desire of those on limited incomes to fix their rates, provided they remember that “banks are not in business to lose money”.

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