Fixed or Variable rates
Buying a home is probably the largest purchase you will ever make, so it's important to make sure that you can afford the monthly repayments if you apply for a bond, says Carl Coetzee, CEO of BetterBond. "Look carefully at your financial situation to see what you can pay and take into account your monthly financial commitments." BetterBond's bond affordability calculator will show what you can afford to spend on a new home, taking into account your income and monthly expenses.
Coetzee explains that consecutive rate cuts in 2021 reduced the prime lending rate to its lowest in 55 years, improving affordability for a home loan by up to 30%. "Although the rates cycle has started to turn, the prime lending rate is likely to remain below double digits for a while yet."
This has reignited the debate about the merits of fixing the interest rate on your home loan to make the most of the favourable lending conditions, says Coetzee. "There isn't a simple answer when it comes to evaluating the benefits of a fixed interest rate or a variable interest rate that fluctuates in line with the repo rate. Each buyer's financial situation and circumstances are unique."
He adds that when applying for a home loan, it is by default on the basis of a variable interest rate. "Only once your bond has registered can you apply for a fixed interest rate and there is a strict time limit attached before the offer lapses."
The following factors will help you decide on the most suitable interest rate options for your specific needs, says Coetzee.
Understand the repo rate and prime lending rate.The repo rate is set by the Reserve Bank and indicates the rate at which they loan to commercial banks.
This is not the same as the prime lending rate, which is the rate at which banks lend to consumers. Banks have running costs and other expenses which, when calculated with the risk of loaning money, results in the prime lending rate. The interest rate which banks will offer depends on your credit profile - including whether you have maintained regular payments - and affordability.
Loan term.Fixed interest rates are set for up to five years maximum which means that on a 20-year loan you will need to renegotiate the terms, and these terms could be less favourable than they were before.
Generally, a fixed interest rate is higher than a variable rate as it poses more of a risk to the bank. It is only negotiated at the time of bond registration and the rate offered is dependent on the going rate at that specific time.
- Loan repayment period.The longer the loan repayment or amortisation period, the larger the influence a change in the interest rate will have on your repayments.
"While market conditions are useful, it's even more important to remember that past trends are not always good indicators of future performance. The determining factor when it comes to deciding on whether to fix the interest rate on your bond should be affordability," concludes Coetzee.