Author : Adrian Goslett, CEO of Re/Max of Southern Africa
Pros and cons of a fixed rate: 04 November 2013
With the prime interest rate at a low that was last seen in the market more than 30 years ago, many homeowners may be contemplating fixing the rate on their bond.
This is particularly appealing to homeowners who are risk averse and want a fixed amount that they can budget for each month, said Adrian Goslett, CEO of Re/Max of Southern Africa.
“Where a homeowner stands financially, along with their appetite for risk, will be the determining factors as to whether a homeowner chooses to fix their rate or opt for a variable or flexi rate. Homeowners who are at their budget’s limit and cannot take the risk of an interest rate increase are probably more likely to opt for a fixed rate than those who have some breathing room in their budget.
The security of a fixed rate ensures that the homeowner will not have to deal with any unexpected changes and additions to their monthly expenses for a fixed period of time. However, that said, there are a few elements that a homeowner should think about before they decide to fix their rate,” said Goslett.
Goslett said that fixing the rate would give homeowners the benefit of knowing what their instalment will be over a fixed period of time, irrespective of the change in prime interest rate, however this does come at a cost. Depending on the agreed terms of the contract, a fixed rate is generally between 1.5 percent and 2 percent above the current prime rate to absorb the bank’s risk.
“Essentially, a fixed rate will provide the homeowner with a kind of buffer should there be a sharp increase in the interest rate within the time period that their rate is fixed for, although, if there is no increase, the homeowner will be paying more money into their bond than what they would have if their interest rate was linked to the prime interest rate. Given the position of the current economy on a global scale, it is unlikely that any significant interest rate increases will occur in the short term,” said Goslett. “However, that said it is expected that the interest rate will start to increase from the second half of 2014.”