Interest rates are almost at a 47-year low - should you fix your home loan rate?
- Two of the five members of the monetary policy committee voted against a rate cut on Thursday.
- Economists believe this could signal that there may be only one more rate cut left.
- This may prompt mortgage holders to fix their rates - but, importantly, your bank will decide which fixed rate it is prepared to offer.
- For more articles, go to www.BusinessInsider.co.za.
On Thursday, the Reserve Bank cut the repo rate by
another 25 basis points to 3.50% - the lowest rate in almost half a century.
The prime rate is now 7%.
Given that inflation is at its weakest level in 15 years, the cut was expected. Less expected was that two of the five members of the monetary policy committee (MPC) voted against it.
The split was a surprise, said Rand Merchant Bank economist Mpho Tsebe.
“I think what the MPC members are trying to signal is that we are perhaps nearing or at the end of the cutting cycle," Tsebe told Bruce Whitfield on The Money Show on 702 and Cape Talk.
South African interest rates have already been cut by 300 basis points since the start of the year – much more than the median cut of 100 basis points in other emerging markets. Tsebe expects there may be one more 25 basis point cut. “And that’s about it.”
Sanisha Packirisamy, economist at Momentum Investments, also suspects that South Africa is nearing the end of its cutting cycle, with modest room for 25 basis points. “Despite paltry growth forecasted for this year and next and downward pressure from muted demand on inflation in the near term, the SARB maintained a cautious view on longer term inflation expectations, suggesting that significant easing was less likely from here.”
The cuts this year has already meant a steep decline in bond repayments – on a new mortgage of R2 million at the prime rate, you will now pay around R3,800 a month less than at the start of the year.
This may prompt those with a home loan to consider fixing their mortgage rate.
You first have to confirm with your bank which fixed rate it will offer, and for how long, says Simon Brown, analyst and founder of the financial education platform Just One Lap. Typically, banks will fix a home-loan rate for a maximum of five years.
The fixed rate they will offer is usually higher than the current floating rate, he adds.
"Fixed rates offered by the bank vary on a regular basis, and depend on a number of factors, including the outlook of the bank on the future movement of interest rates. Customers, therefore, cannot choose which rate to fix at, but can ask to be quoted on the rates available at any given time, and select whether to fix at the offered rate then, or not," says FNB's head of home finance Mfundo Mabaso.
Also, the longer you want to fix the rate for, the higher the rate on offer will be.
"In an environment where rates are going lower and probably staying low for a long time, if you are going to fix a rate, you want it to be fixed at a really proper level, rather than something that is higher than the current rates," Brown added.
But fixing your interest rate at 7% would probably be an attractive deal, says Brown.
The big benefit of a fixed rate mortgage is the certainty it brings, as this kind of payment is usually the biggest monthly cost in most households," according to head of customer delight at Nedbank Home Loans Thozama Mochadibane,
The downside, however, according to Mochadibane, is that "locking yourself into a fixed rate for say three years, is that there is a chance that interest rates could remain low or fall even further over that time, leaving you paying more than you otherwise would have".
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